ACCA AAA (P7) Course Notes ACCA AAA (P7) Course Notes

lOMoARcPSD|6235581
ACCA AAA (P7) course Notes
Advanced Audit & Assurance (Association of Chartered Certified Accountants)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by Abbas Khan (saravk_3@hotmail.com)
lOMoARcPSD|6235581
AAA Course notes 
1 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A: REGULATORY ENVIRONMENT 3

Syllabus A1: International regulatory frameworks 3
Syllabus A2: Money laundering 9
Syllabus A3: Laws and regulations 22
Syllabus B: PROFESSIONAL AND ETHICAL CONSIDERATIONS 26

Syllabus B1: Code of Ethics for Professional Accountants 26
Syllabus B2: Fraud and error 41
Syllabus B3: Professional liability 45
Syllabus C: PRACTICE MANAGEMENT 50

Syllabus C1: Quality control 50
Syllabus C2: Advertising, publicity, obtaining professional work and fees 61
Syllabus C3: Professional appointments 66
Syllabus D: AUDIT OF HISTORICAL FINANCIAL INFORMATION 71

Syllabus D1: Planning, materiality and assessing the risk of misstatement 71
Syllabus D2: Evidence 91
Syllabus D3: Evaluation and review 105
Syllabus D4. Using the work of others 188
Syllabus D5: Group audits 202
Syllabus E: COMPLETION & REVIEW 213

Syllabus E1. Subsequent events and going concern 213
Syllabus: E2 Completion and final review 219
Syllabus E3: Auditor’s reports 225
Syllabus E4: Reports to those charged with governance and management 238
Syllabus F: OTHER ASSIGNMENTS 240

Syllabus F1: Audit-related and assurance services 240
Syllabus F2: Specific assignments 244
Syllabus F3: The audit of social, environmental and integrated reporting 258
Syllabus F4: The audit of performance information (pre-determined objectives) in the public sector 264
Syllabus F5: Reporting on other assignments 269
Syllabus G: CURRENT ISSUES AND DEVELOPMENTS 273

Syllabus G1: Professional and ethical developments 273
Syllabus G2: Other current issues 274
2 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A: REGULATORY ENVIRONMENT

Syllabus A1: International regulatory frameworks
Syllabus A1a) Explain the need for laws, regulations, standards and other guidance
relating to audit, assurance and related services.
The Need for Standards and Regulations
Regulation is needed to ensure that auditors are acting in the public interest
These 'regulations' come in 4 ways:
1. Ethics
2. Standards
3. Regulations
4. Statutory
The international regulatory framework for audit and assurance services

encompasses:
1. International Federation of Accountants (IFAC) pronouncements

2. Corporate Governance
Other Boards
• IAASB (International Auditing & Assurance Standards Board) 
These develop ISAs but they must be in the public interest so are overseen by.
3 aCOWtancy.com

lOMoARcPSD|6235581
• PIOB (Public Interest Oversights Board) 

Their role is to make sure everything is in the public interest and not just in the interest of
the auditor
• IESB (International Ethics Standards Board) 

Their role is to create an ethics code of conduct for all auditors to follow
4 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A1b) Outline and explain the need for the legal and professional framework
including:
i) public oversight to an audit and assurance
practice
ii) the impact of corporate governance principles on audit and
assurance practice
Public Interest Oversights Board
A profession has a responsibility to the public
Public Interest Oversight Boards:
1. Oversees IFAC's auditing and assurance
2. Believes standards should be high quality, clear and usable
3. Ensures auditors act independently of personal interests, and be responsive to

emerging needs of standard users
4. Promote compliance with IFAC standards by the member bodies of IFAC around the
world
5 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A1b) Outline and explain the need for the legal and professional framework
including:
iii) the role of audit committees and impact on
audit and assurance practice.
Audit Committees
Structure of the Committee
At least one member of the committee should have recent and relevant financial
experience.
There should be at least 3 non executive directors. In the case of smaller companies, this
may be 2.
Role of the committee
1. To improve the quality of financial reporting
2. To increase the confidence of the public in the financial statements.
3. Assist directors in meeting their responsibilities in respect of financial reporting.
4. Provide a channel to external auditors to report concerns or issues.
5. Review the company’s system of internal controls.
6. Strengthen the position of internal audit by providing greater independence from

management.
7. Appointment of external auditor.
6 aCOWtancy.com

lOMoARcPSD|6235581
Advantages of a committee
1. Independent Reporting 
Provides internal audit with an independent reporting mechanism. Without this
management may be tempted to hide unfavourable reports.
2. Frees up Executive time 

Leaves top executives free to manage by providing expertise on financial reporting
3. Corporate Governance monitored 

Ensures that corporate governance requirements are brought to attention of the board
4. Appropriate Internal Controls 

Should ensure that an appropriate system of internal control is maintained.
5. Better Communication 
Better communication between the directors, external audit and management is
facilitated.
6. Strengthens external audit independence 

Strengthens independence of external audit as their appointment is now not made by
the board.
Disadvantages of Committee
1. Executive directors may perceive it as a threat to their authority.
2. Finding non executive directors with appropriate expertise may be difficult.
3. Additional costs will be involved.
4. Too much detail may be thrust upon non executive directors.
7 aCOWtancy.com

lOMoARcPSD|6235581
Communication with the audit committee
Why does the external auditor speak first to the Audit Committee?
1. To ensure independence between the board and the audit firm.  

The audit committee consists of independent NEDs, who can therefore take an
objective view of the audit report.
2. The audit committee has more time to review the audit report and other
communications (e.g. management letters) than the board.  
The auditor should therefore benefit from their reports being reviewed carefully
3. The audit committee can ensure that any recommendations from the auditor are
implemented.  
The NEDs can pressurise the board to taking action on auditor recommendations
4. The audit committee also has more time to review the effectiveness and
efficiency of the work of the external auditor than the board.  
The committee can therefore make recommendations on the re-appointment of the
auditor, or recommend a different firm if this is appropriate
8 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2: Money laundering
Syllabus A2a: Define ‘money laundering’ and discuss international methods for
combatting money laundering
Money Laundering Basics
Money laundering is creating the appearance that money obtained from

crimes originated from a legitimate source.
Money laundering is thus the process by which criminals attempt to conceal the true origin
and ownership of the proceeds generated by illegal means, allowing them to maintain
control over the proceeds and, ultimately, providing a legitimate cover for their sources of
income.
The term is widely defined to include:
• Possessing
• Dealing with in any way
• Concealing  
 
.....the proceeds of any crime
Money laundering usually consists of three steps

1. placement,
2. layering and
3. integration.
9 aCOWtancy.com

lOMoARcPSD|6235581
1. Placement
is the depositing of funds into the financial system
To disguise criminal activity, launderers route cash through a "front" operation; that is
often, a cash based business
 
The entry of cash into the financial system, (placement’ stage) is where the launderer is
most vulnerable to detection.  
Because of the large amounts of cash involved it is extremely hard to place it into a bank
account legitimately
2. Layering
involves the wire transfer of funds through a series of accounts in an attempt to hide the
funds' true origins.
This often means transferring funds to countries which have strict bank-secrecy laws.  
Once deposited in a foreign bank, the funds can be moved through accounts of "shell"
corporations, which exist solely for laundering purposes.  
The high daily volume of wire transfers makes it difficult to keep track of for those
investigating it 
The keeping of comprehensive transaction records by financial organisations provides a

useful audit trail and gives useful information on people and organisations involved in
laundering schemes once discovered.
3. Integration
involves the buying of legitimate goods, using the cash after the layering stage
10 aCOWtancy.com

lOMoARcPSD|6235581
International Efforts on Money Laundering
The Financial Action Task Force on Money Laundering (FATF) is an

international body which sets standards, and develops policies to combat
money laundering and terrorist financing
It currently has 35 member countries/territories and observers such as the World Bank and
International Monetary Fund.
Their recommendations are endorsed by more than 180 countries and are the
international anti-money laundering standard against which national anti-money laundering
systems are assessed
The recommendations cover

• Policies and coordination
• Money laundering and confiscation
• Terrorist financing and financing of proliferation
More specifically these deal with:

1. The scope of the criminal offence of money laundering
2. Measures to prevent money laundering including:  

– customer due diligence (CDD) and record-keeping; and  
– reporting of suspicious transactions and compliance to an external financial
intelligence unit (FIU);
3. Measures needed in systems for combating money laundering, including transparency

of legal persons and arrangements
4. International co-operation including mutual legal assistance and extradition
11 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2b: Explain the scope of criminal offences of money laundering and how
professional accountants may be protected from criminal and civil liability.
Scope of Money Laundering
These are the common ones under UK legislation but generally apply
worldwide and hence in the exam..
1. Not appointing a Money Laundering Reporting Officer (MLRO)

2. Not having risk management procedures and internal controls complying with anti-ML
legislation
3. Not verifying identity of all new clients
4. No ongoing client due diligence
5. Failure to report a suspicion of ML
6. Tipping off
7. Tax evasion
Tipping-off
This is when an individual who is suspicious, discloses that suspicion to the suspect
In fact even non-disclosure/action may be considered tipping off (e.g. not carrying out a
client's instructions that is effectively a money laundering operation).
If the client asks the accountant to commit a suspected ML offence, this must be reported
to the appropriate authority
Also not being suspicious is not a defence if it is clear that a reasonable person should
have been suspicious
The fear of tipping off should not prevent the professional accountant from discussing
money laundering matters with clients on a non-specific basis. Not doing so, when
requested, may amount to tipping off.
12 aCOWtancy.com

lOMoARcPSD|6235581
How Accountants May Be Protected
All partners are potentially liable on a joint and several basis for breaches of the firm's
obligations.
Defences to money laundering offences include:
• Reporting to the MLRO

• Intending to report BUT there was a reasonable excuse for not doing so (fear of
violence)
• We thought the client's actions were in good faith (and it's a reasonable assumption)
13 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2c: Explain the need for ethical guidance in this area.
Ethical Framework or Rules
Current Issue - Is an ethical framework better than rules?
Here's some reasons why a framework is good…
• Needs auditor to consider his situation actively - not just a checklist

• Ensures there are no loopholes by interpreting rules too narrowly
• Every situation is different
• A framework works better in changing environments
14 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2d: Describe how accountants meet their obligations to help prevent and
detect money laundering including record keeping and reporting of suspicion to the
appropriate regulatory body.
How Accountants Prevent Money Laundering
Accountants have money laundering obligations..
The following will prevent their organisations being used for money laundering
purposes:
• Establish a top-down anti-money laundering culture

• Have risk management procedures & internal controls
• Appoint a money laundering reporting officer (MLRO)
• Have record keeping systems for all transactions
• Keep systems for initial verification and continued monitoring of clients' identities
• Have internal suspicion reporting procedures
• Educate and train all staff in the main requirements of  
the legislation
Money Laundering Reporting Officer
Basically should have a suitable level of seniority and experience
If the MLRO is away then a deputy must be appointed (as reports must be made as soon
as practicable)
Sole practitioners do not need to appoint an MLRO
15 aCOWtancy.com

lOMoARcPSD|6235581
MLRO Responsibilities Include
• Internal reports of money laundering

• Deciding if sufficient grounds for suspicion
• Preparing the external report to present to the appropriate authority
• Key liaison individual with the authorities
• Advising the engagement individual/team on how to continue their work and interact with
the client
• Training on ML matters
• Designing anti-ML systems
16 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2e: Explain the importance of customer due diligence (CDD) also referred to
as Know Your Customer (KYC) and recommend the information which should be
gathered as part of CDD/KYC.
Importance of Customer Due Diligence
This is vital so as you know who you are dealing with - this is more than just
getting their passports or certificates of incorporation (if they’re a company)
To know what is a suspicious transaction you must understand what their business
patterns and models are
Also know where their income should come from, so any money laundering income would
look suspicious
Client Acceptance Procedures
Identification procedures
1. Know your Client information 
including... passports, driving licences, utility bills.
2. Also company registration documents 
3. Their expected patterns of business
4. Their business model
5. Where their funds come from

 
17 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2f: Recognise potentially suspicious transactions

and assess their impact on reporting duties.
Reporting Duties
Professional accountants must report money laundering to the appropriate

authority (e.g. MLRO, Police).
Some Points about Reporting
• It is a criminal offence not to report

• Regardless of the amount or seriousness
• There is no obligation to quantify the certainty of suspicion
• There is no automatic need to cease working for a particular client where a report has
been filed
• Doing so may even be tipping off!
An external report should be made to the authorities
It should include the following:

1. Name of the reporting business
2. Identification information of each person (DOB, address etc)
3. Role of each person (e.g. Suspect)
4. Any references seen (e.g.Bank account)
5. Details of suspicious transaction
6. Location of any laundered property
18 aCOWtancy.com

lOMoARcPSD|6235581
Resignation
You should consider resigning where..

• It is in your commercial interests to do so
• It is professionally and ethically responsible to do so
Just be careful to avoid tipping off. Again, legal advice should be sought if in doubt
What are suspicious transactions?

• Large cash deposits
• Unexplained foreign transactions
• Transactions with no business explanation
19 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A2g: Describe, with reasons, the basic elements of an anti-money laundering
program.
Anti-Money Laundering Programme
The MLRO is responsible for setting up the anti-money laundering

programme
The following is required:
• Dedicated Resources
An MLRO in place
The MLRO has appropriate knowledge, experience and responsibility
• Written Policies and Procedures 

 
The procedures should use available technology and identify risk factors - items to look
for when detecting money laundering 
These risk factors could include:

• Secrecy with a transaction
• Transactions through several jurisdictions or financial institutions without any apparent
purpose
• Using central bank or government-owned banks as the source of funds
• A rapid increase/decrease in a balance, not explained by fluctuations in the underlying
market value of investments held
• Frequent or excessive use of funds/wire transfers in or out of an account
• Repeated deposits or withdrawals just below the monitoring and reporting threshold on
or around the same day
• A pattern that after a deposit or wire transfer the same (or similar) amount is wired to
another financial institution (especially one that is offshore).
20 aCOWtancy.com

lOMoARcPSD|6235581
• A frequent clearing out of an account for purposes other than maximising the value of the
funds held in the account
• Comprehensive Coverage
All aspects of a company's business, particularly those that 
have contact with customers should be covered
A comparison of the account holder's identity to the government lists of known or

suspected terrorists
• Timely Escalation and Resolution

• Timely reports
• Appropriate reviews of the report
• Identify the outcome / resolution of matters
• Explicit Management Support

• Senior management should set the tone
• Their support clearly visible to all employees
• Sufficient Training and Education

• Integral to the whole programme
• Courses on how to recognise suspicious activity and what to do next
• Regular Review of the Program

• To make sure it is working as designed
• Accompanied by a formal assessment / report
21 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A3: Laws and regulations
Syllabus A3a: Compare and contrast the respective responsibilities of management and
auditors concerning compliance with laws and regulations in an audit of financial
statements.
Responsibilities of management and auditors
Management is responsible for ensuring that the company complies with laws
and regulations
Auditors are responsible for:

• concluding FS free from misstatements caused by non-compliance with laws and
regulations
• having a general understanding of the legal and regulatory framework within which the
company operates
• applying professional scepticism
• obtaining a general understanding of applicable laws and regulations
• understanding how the entity complies with those laws and regulations
• identifying instances of non-compliance
• being aware of the impact of breaches of regulations on the assertions
Responsibilities of Management (and Those Charged With Governance)

1. Prevention AND detection of fraud and error
2. Strong risk management and internal control
3. A culture of honesty and ethical behaviour
4. Compliance with applicable laws and regulations
5. Monitoring legal requirements
6. Developing, publicising and following a Code of Conduct
7. Training 
22 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A3b: Describe the auditors considerations of compliance with laws and
regulations and plan audit procedures when possible non- compliance is discovered.
Non-Compliance Discovery
There are indicators that Non-compliance may have occurred
These are:
1. Government Investigations
2. Fines or penalties
3. Unspecified payments for to related parties or (government) employees
4. Excessive sales commissions
5. Purchasing at not market price
6. Unusual bank transfers
7. Payments without exchange control documentation
8. Lack of adequate audit trail
Consequences of Non-Compliance
• Provision for fines, charges etc
• Potential disclosures needed
• Decide if so serious that true and fair view is questioned
Procedures when possible noncompliance is discovered
These are:
1. Document findings
2. Discuss with management
3. Discuss with their lawyer
4. Discuss with own lawyer
5. Consider impact on other areas of the audit
6. Consider if you can now rely on other management representations 
23 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A3c:Discuss how and to whom non-compliance should be reported.
How to Report on Non-Compliance
Auditors should tell directors of any non-compliance immediately
This should happen without delay, and make appropriate reports, as set out below:
THOSE CHARGED WITH GOVERNANCE

• If the auditors suspect non-compliance with laws and regulations
• Communicate to audit committee
• Consider the need for legal advice
SHAREHOLDERS
• Only if it causes FS to not give a true and fair view or there is a fundamental uncertainty
• Report in usual way (See reporting section)
REGULATORY AUTHORITIES
• Auditor decides if there's a responsibility to report to parties outside the entity
24 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus A3d:Recognise and recommend when withdrawal from an engagement is

necessary.
When to Withdraw From the Engagement
This is a last resort
There are many factors to consider

1. Are management implicated?
2. Non-compliance affect on relationship with client
3. Legal responsibilities?
4. Any alternatives?
WHEN TO WITHDRAW
• Management refuses to remedy the situation
• Significant doubts about the competence or integrity of management
When withdrawing the auditor must

• Discuss the reasons for WITHDRAWING with the appropriate level of management
• Consider any professional or legal requirements to report his withdrawal
25 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B: PROFESSIONAL AND

ETHICAL CONSIDERATIONS
Syllabus B1: Code of Ethics for Professional

Accountants
Syllabus B1a) Explain the fundamental principles and the conceptual framework
approach.
Fundamental Principles
The 5 fundamental principles of the ACCA Code of Ethics must be followed
The 5 Fundamental principles and what they mean
1. Integrity
Be straightforward and honest in all professional relationships 
2. Objectivity 
No bias or conflict of interest influencing your business judgements
3. Professional Competence & Due Care 

Keep up your professional knowledge and skill so as to give a competent professional
service, using current developments and techniques 
Act diligently and within appropriate standards when providing professional services 
26 aCOWtancy.com

lOMoARcPSD|6235581
4. Confidentiality 
Don't disclose any confidential information to third parties without proper and specific
authority.
You can, however, if there is a legal or professional right or duty to disclose, Obviously
never use it for personal advantage of yourself or third parties 
5. Professional behaviour 
A professional accountant should act in a manner consistent with the good reputation
of the profession 
Refrain from any conduct which might bring discredit to the profession
In the exam question you may have to apply these to a case study - groovy baby..
27 aCOWtancy.com

lOMoARcPSD|6235581
Confidentiality
Never disclose unless consent has been given or you're obliged to
Recognised exceptions to the duty of confidentiality

Sometimes disclosure is required and sometimes it is voluntary
• Obligatory disclosure 
when the auditor knows, or has reason to suspect that, a client has committed.. 
• Treason
• Terrorism
• Drug trafficking
• Money laundering
More exceptions
• Voluntary disclosure 
This is permitted in the following circumstances: 
1. Protecting Member Interests 

For example, defending yourself against an accusation of negligence
2. Legal Process 
The courts may require documents
3. Public Interest  
For example - Informing tax authorities of non-compliance by a client company
with tax regulations
28 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B1b) Identify, evaluate and respond to threats to compliance with the
fundamental principles.
f) Consider the ethical implications of the external auditor providing non-audit services to
a client including an internal audit service.
Threats
An auditor must be independent and be seen to be independent
Categories of Threat
Auditors need to be fully aware of situations that may damage their independence.
1. Self-interest  
Here the auditor may have a financial (or other) interest in a matter. 
Therefore the auditor may not act with objectivity and independence.
2. Self-review  
Here the auditor reviews a judgement she has taken herself.  
Or an audit firm prepared the financial statements and then acted as auditor. 
This is a threat to objectivity and independence.
3. Advocacy  
Here the auditor is expected to defend or justify the position of the client, and act as an
‘advocate’. 
This is a threat to objectivity and independence.
4. Intimidation  
Here the auditor can't act independently as she is scared due to intimidatory threats
such as the threat to take away the work unless they do as the client wishes.
29 aCOWtancy.com

lOMoARcPSD|6235581
5. Familiarity  
Here the auditor and client have a too close relationship, for example due to a long
association over many years in carrying out the annual audit.
Examples of Threats
• Financial Interest 
Here look for the nature of the interest and the degree of control the accountant has over
it - obviously the more control the higher the risk. 
No member of the assurance team (or immediate family) should hold a financial interest
in a client.  
The interest should either be disposed of, or the team member removed from the
engagement. 
• Loans and guarantees 

If the client is a bank (or similar) and the loan is on normal commercial terms then there
is no threat to independence.  
All other loans or guarantees are a self- interest threat and should be avoided. 
• Close business relationships 

A material joint venture with a client is a self-interest threat, so should be avoided.  
Buying things from a client is fine if on normal commercial terms and in the normal
course of business. 
• Family and personal relationships 

Think here about the seniority of the assurance staff and the closeness of the
relationship. 
If the family member is able to exert significant influence over the subject matter then the
threat to independence can only be avoided by removing the individual from the
assurance team. 
30 aCOWtancy.com

lOMoARcPSD|6235581
• Recent employment with client 

The threat can be reduced by getting an independent third party to review the audit file. 
If a member thinks they might soon be employed by the client (having applied for a job
there) then this should be disclosed by the member immediately. 
• Serving on the board of assurance clients 

Auditors should not do this. 
Although if it's only routine administrative services, like a company secretary, then it may
be ok. 
What is vital is that they are not involved in making management decisions. 
• Long association of senior personnel with assurance clients 

This may cause a familiarity threat.  
In the exam you need to look at the nature of the role and the length of time that he has
been doing it when deciding which staff members to involve in assurance work. 
An audit engagement partner and/or quality control reviewer shouldn't work on the same
client for more than seven years and should not be returned to the engagement for at
least two years after being rotated off the team. 
• Fees 
If the client fees are a large proportion of a firm’s total fees, there is a significant self-
interest threat.  
ACCA rules state that recurring fees paid by one client or a related group of clients
should not exceed 15% of the income of the audit practice (10% if the client is listed). 
In larger firms an individual office may exceed these limits as long as responsibility for
signing off the audit file should be passed to a different office. 
Overdue fees should be avoided as they are practically a loan. 
• Gifts and hospitality 

Only accept if not significant to either party 
Consider the following:

• Could the value affect objectivity?
• Was the hospitality when the auditors should have been working?
31 aCOWtancy.com

lOMoARcPSD|6235581
• Were remaining members of the team properly supervised?

• Ensure the member checked with more senior people in the firm to check if it was
allowed - otherwise it is a disciplinary offence also. 
• Actual and threatened litigation 

If actual litigation then resign from the engagement.
32 aCOWtancy.com

lOMoARcPSD|6235581
Typical threats
The auditor is tempted to gain a personal or family benefit rather than give an
appropriate service
Holding Shares in a client
• Don't! Here look for the nature of the interest and the degree of control the accountant
has over it - obviously the more control the higher the risk  
• No member of the assurance team (or immediate family) should hold a financial interest
in a client.  
• The interest should either be disposed of, or the team member removed from the
engagement
Significant Income from client

Limit the amount 10% of total fees if listed 
15% of total fees if unlisted 
In larger firms an individual office may exceed these limits as long as responsibility for
signing off the audit file should be passed to a different office.  
Overdue fees should be avoided as they are practically a loan
Separate business venture with client

Don't! Although buying things from a client is fine if on normal commercial terms and in the
normal course of business
Giving a loan to the client

This may include unpaid audit fees
Don't
33 aCOWtancy.com

lOMoARcPSD|6235581
Getting a loan from a client

If the client is a bank (or similar) and the loan is on normal commercial terms then there is
no threat to independence.  
All other loans or guarantees are a self- interest threat and should be avoided
Lowballing
Setting a very low fee either to attract new clients or ensure further work 
Safeguard 
Auditors should not set fees in this way, the fee must be based on a pre-determined level
of work required
Hospitality and Benefits

Any such items given to the auditor by a client could be seen to be a bribe 
So do not accept
Contingent Fees
Where auditors fees are contingent on another event happening. 
Audit Fees are not to be determined in this way
Accounting Services
If an auditor prepares the accounts it is 100% sure that they will be reviewing their own
work. They may be tempted to hide errors to save face. 
So the Auditor must not undertake accounting services for a client, if they are a LISTED
company. 
No management decisions should be made in other companies and a different team
should provide each service.
34 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B1c) Discuss and evaluate the effectiveness of available safeguards.
Safeguards
Safeguarding independence is the responsibility of the audit firm & the

profession
Audit Firm Level
A culture of independence should be created, this means a rotation of the engagement

partner and senior staff.
In addition, an audit firm should have the following procedures in place:
• Training 
To an appropriate level for the role 
• Quality control procedures 

This ensures that independence is considered in all work performed by the audit firm. 
• Consultation 
So issues can be discussed internally and procedures are laid out to facilitate this 
• Ethical Codes 
of conduct 
• Internal Controls
35 aCOWtancy.com

lOMoARcPSD|6235581
The Profession
The profession should take disciplinary action as appropriate.
The profession regularly suggest new practices and procedures designed to improve
auditor independence.
So things that the profession do to help safeguard against ethical threats are:
1. Regular rotation of auditors made compulsory
2. Using audit committees
3. ACCA Exams and CPD :)
4. Corporate Governance and of course auditing standards
The Individual
An individual auditor can limit ethical threats by..
• Complying with CPD regulations - and staying up to date

• Keeping in contact with fellow professionals
• To informally discuss issues and problems
• Independent Mentor used to discuss individual threats
36 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B1d) Recognise and advise on conflicts in the application of fundamental

principles.
Resolving Ethical Issues
When the auditor is suspicious of an ethical threat, action must be taken
Follow these steps..
1. Assess the facts

2. Consider ethical Issues
3. Fundamental Principles Are they affected?
4. See what established procedures there are for dealing with it otherwise..
5. Look for alternative measures such as an external regulator, or worst case scenario,
resigning!
37 aCOWtancy.com

lOMoARcPSD|6235581
Conceptual Framework
The conceptual framework works like this..
1. Identify the threat that may cause a fundamental principle to be broken

2. The fundamental principle how likely is it to be broken?
3. Limit the risk if the threat is more than negligible - to an acceptable level
There are 3 types of safeguards

which can limit the risk
• Profession
• Training & Education Gaining experience at work, passing your exams :) & CPD on
ethical matters
• Legislation On things such as who is fit and proper to become an auditor
• Corporate Governance regulations These often set out best practice for some ethical
situations
• Individual
• CPD Keeping up to date with auditing standards and developments
• Networks Keeping in contact with other professionals to discuss matters informally or
contacting ACCA for guidance
• Independent Mentor A formal relationship with another auditor to discuss ethical
threats on a confidential basis
• Work
• Codes of Conduct created and followed by the firm with controls and procedures in
place
• Ethical Standards Relating to audit engagements such as discussions with audit
committees and staff rotation policies 
38 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B1e) Discuss the importance of professional scepticism in planning and

performing an audit.
Professional Scepticism
A healthy scepticism is a fundamental part of any audit
We need to see more scepticism
Not a total distrust it requires an enquiring mind that is open to the possibility that
something may be wrong 
Is it supported by evidence 
Is it consistent with what is known from elsewhere?
Are assumptions reasonable? In today's world, impairment testing is commonplace and

works on assumptions 
The auditor needs to not only see a record of what the assumptions are, but also
challenge them and understand how they affect the conclusions the client has come to.  
Too often it seems that the auditor is looking for reasons why assumptions can be
supported, without also considering facts that might suggest they are not appropriate - too
optimistic, for example.
Is there sufficient evidence? If an auditing standard requires a certain presumption - for

example, of a significant risk of  
fraud in the case of revenue recognition - does the auditor too easily find reasons for
overriding the presumption?
39 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B1g) Assess whether an engagement has been planned and performed with
an attitude of professional scepticism, and evaluate the implications.
Professional Scepticism and Judgement
When planning and performing an audit, the auditor should adopt an attitude
of professional scepticism
It is “An attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence”
In other words, they must not simply believe everything management tells them
The exercise professional judgement in planning and performing an audit
The auditor will need to exercise professional judgement on both the quantity and the
quality of evidence.
So he has to judge..
1. When is there sufficient evidence?
2. What is the quality of this evidence?
Factors to help with the judgement are...

• The seriousness of the risk
• The materiality of the item
• The strength of internal controls
• The sampling method used (see later)
40 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B2: Fraud and error
Syllabus B2a) Identify and develop an appropriate response to circumstances which

indicate a high risk of error, irregularity, fraud or misstatement in the financial statements
or a given situation.
Definitions
Fraud
An intentional act....involving the use of deception to obtain an unjust or illegal

advantage.
Three main areas of fraud exist:

• Corruption
• Misappropriation of assets
• Financial statement fraud
Error
An unintentional misstatement in financial statements, including the omission of an

amount or a disclosure
Examples are:
• A mistake in gathering data from which FS are prepared
• An incorrect accounting estimate due to an oversight
• A mistake in applying accounting principles
Irregularity
An intentional misstatement to mislead users

If a material error is identified, but not corrected it becomes an irregularity
41 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B2b) Compare and contrast the respective responsibilities of management and
auditors for fraud and error.
Management and Auditor Responsibilities
Management Responsibilities
These are:
1. Safeguards created to avoid fraud and error using internal controls

2. Internal audit is responsible for monitoring and implementing these
Auditor Responsibilities
If fraud or error leads to a material misstatement, the auditor is responsible for detecting
it.
At the Planning Stage

The auditor must consider the risk of material misstatement due to fraud and error when
planning and performing their audit
If fraud is discovered
Report it to the audit committee or
Highest level of management (if not involved in the fraud), or
Shareholders if the fraud is by those in senior management
42 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B2c) Describe the matters to be considered and recommend procedures to be

carried out to investigate actual and/or potential misstatements in a given situation.
Investigating Misstatements
If a misstatement is discovered, the audit impact needs to be considered
This is done by:

1. looking at the circumstances of the offence
2. Gathering information about the FS effect
3. If material, additional procedures should be carried out
4. Communicated to those charged with governance
Find out their action to rectify it and whether it is likely to happen again.
Syllabus B2d) Explain how, why, when and to whom fraud and error should be reported
and the circumstances in which an auditor should withdraw from an engagement.
Reporting Fraud and Error
Fraud and error must be reported to management or the audit committee

ASAP
What about reporting to shareholders?

By including a paragraph in the audit report
What if it's in the public interest?

Report to a 3rd party (e.g. Regulator) 
Especially if management involved
43 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B2e) Discuss the current and possible future role of auditors in preventing,
detecting and reporting error and fraud.
Audit Approach
Audit teams members should discuss the risk of fraud at planning stage
Further Procedures:
1. Ask Management what their assessment of the risk is
2. Ask Management what their processes are for identifying and dealing with these risks
3. Ask Management how they communicate this process to staff
4. Ask management if any actual or suspected fraud has occurred
44 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B3: Professional liability
Syllabus B3a) Recognise circumstances in which professional accountants may have

legal liability and the criteria that need to be satisfied for legal liability to be recognised.
When are Auditors Liable to their Client?
The auditor has a contract with her client
This means that the contract can be broken by the auditor and so become liable.
This begins when it can be shown that the auditor didn't use "reasonable skill and care”.
How can you show "Due skill and care"?

• Applying IFRS and ISA's correctly
• Following ethical standards
• Following engagement letter terms
• Using properly trained and competent staff
45 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B3b) Describe the factors to determine whether or not an auditor is negligent in
given situations.
Being Sued for Negligence
This means 3 tests need to be proven:
1. Duty of Care owed

• This is obvious for an audit client (though not necessarily for 3rd Parties)
2. Breach of that Duty
such as..
• Incorrect Opinion
• ISA's not followed correctly
3. Client suffered a Financial Loss
• The client wouldn't have made this loss otherwise
Client 3rd party
Duty of care exists? Automatic Needs proving
Breached? Needs proving Needs proving
Loss made? Needs proving Needs proving
46 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B3c) Compare and contrast liability to client with liability owed to third parties (ie
contract vs establishing a duty of care).
When are Auditors Liable to 3rd Parties?
A duty of care must be owed to a 3rd party - and it needs proving!
Client 3rd party
Duty of care exists? Automatic Needs proving
Breached? Needs proving Needs proving
Loss made? Needs proving Needs proving
This involves looking at:

1. Foreseeability of damage to the 3rd party
2. A relationship of "proximity" with the 3rd party
3. It's fair, just and reasonable to impose such a duty on the accountants
Another way of looking at this is..

1. The auditor acted negligently
2. The auditor ought to have known that 3rd parties relied upon her opinion
3. The 3rd party suffered financial loss as a result
CONSEQUENCES
• A shareholder stands no different from any other investing member of the public to whom
the auditor owes no duty
• Shareholders are seen as a class, the auditor reports to the class and not to assist
individuals
47 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B3d) Evaluate the practicability and effectiveness of ways in which liability may
be restricted including the use of liability limitation agreements
LIMITING LIABILITY TO YOUR CLIENT
Reducing liability for statutory audit work is normally not allowable.

However there are options:
• Limited Liability Partnerships

• A separate legal entity the LLP itself is liable to the full extent of its assets
• The liability of the members will be however limited to the investment made in the LLP
• Negligent Partner will still be sued personally - but non-negligent partners are protected
• Limited Liability Agreements

Here companies limit auditor liability by contract - needs shareholder approval
It must be:
1. Fair and reasonable

2. For the current year only
3. Made clear as part of any tender process
48 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus B3e) Discuss and appraise the principal causes of audit failure and other
factors that contribute to the ‘expectation gap’ (e.g. responsibilities for fraud and error)
and recommend ways in which the expectation gap might be bridged.
The Expectation Gap
Difference between client's expectations and actual audit work performed
What causes the 'Expectation Gap'

1. Management misunderstanding their responsibilities
2. Management misunderstanding the scope of the audit
3. Management misunderstand that it is THEIR responsibility to detect fraud
4. Management think that the auditors are liable for any errors
How is the 'Expectation Gap' narrowed?
In the Audit report 

Responsibilities of management and the auditor; 
Show that audits are performed on a test basis only  
A statement that the opinion gives reasonable NOT absolute assurance that FS are free
from material misstatement
In the Engagement letter 

Responsibilities of management and the auditor 
The nature, scope and purpose of an audit
There are many disclaimers protecting the auditor and reducing the amount of reliance
that users can place on these reports.
However, auditors are exposed to the threat of liability from bad clients and without any
protection may not accept many engagements 
49 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C: PRACTICE MANAGEMENT
Syllabus C1: Quality control
Syllabus C1a) Explain the principles and purpose of quality control of audit and other
assurance engagements.
Definitions for Quality Control
Learn the meaning of the following terms:
1. Engagement partner 
The partner responsible for the audit engagement, performance and report  
Also she has the appropriate authority from a professional, legal or regulatory body
2. Engagement Quality Control Review 

Provides an objective evaluation, before signing the report,  
of any significant judgments & conclusions 
It is for listed entity audits and any where the firm thinks such a review is required
3. Engagement Quality Control Reviewer 

Someone not part of the engagement team, with experience and authority to
objectively evaluate the significant judgments & conclusions
4. Engagement team  
All partners and staff performing the engagement, plus anyone engaged by to do audit
work  
This excludes external experts 
50 aCOWtancy.com

lOMoARcPSD|6235581
5. Firm 
A sole practitioner, partnership or corporation of professional accountants
6. Inspection  
These provide evidence of compliance with the firm’s quality control policies
7. Listed entity 
An entity whose shares (or debt) are quoted on a stock exchange
8. Monitoring 
An ongoing evaluation of the firm’s quality control 
It includes periodic inspections of a selection of completed engagements
Principles & Purpose
Firms need to be sure that the audits they perform meet quality standards
This is to decrease the risks of:

• Litigation against us for professional litigation
• Incorrect Audit opinion and hence an increased investor confidence in the financial
statements
There are 2 standards on Quality Control

1. At the FIRM level International Standard on Quality Control 1 (ISQC 1) – Quality
Control for firms that perform audits and reviews
2. At the individual AUDIT level ISA 220 – Quality Control for audits of historical financial
information
ISQC 1 (firm level)

51 aCOWtancy.com

lOMoARcPSD|6235581
ISQC 1 identifies six building blocks of a firm’s system of quality control:
1. Ethics
2. Client Relationships
3. Leadership
4. Human Resources
5. Engagement Performance
6. Monitoring
We will look at the above in more detail in the next section. See you there, hotpants….
52 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C1b) Describe the elements of a system of quality control relevant to a given
firm.
Elements of a QC system
This follows on from the previous section
Firm Level Quality Control
The objective of the firm is to establish and maintain a system of quality control to provide
it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards and applicable legal
and regulatory requirements; and
(b) Reports issued by the firm or engagement partners are appropriate in the
circumstances
1. Leadership
• An internal culture focused on quality is key
• This means training, appraisal & mission statements.
• Commercial considerations never override quality
• Pay & Benefits must reflect commitment to quality.
• Resources must be available to support quality
2. Human Resources
• All staff to have the capabilities & competence to ensure quality.
• Appraisals and development regularly
53 aCOWtancy.com

lOMoARcPSD|6235581
3. Engagement Issues - Planning

• Discuss known risks with the client and document
• Staff suitably qualified and experienced, have knowledge of the client
• Contentious areas must be consulted on in a cost effective way
• A timetable for suitable reviews
• Ensure independence and any issues addressed
• Time pressure 
All audits should be planned to ensure that adequate time 

can be spent to obtain sufficient appropriate audit evidence to support the audit opinion.
4. Engagement Issues - Supervision

• Staff supervised and assessed to control the work flow.
• Any problems tackled immediately and consultation on any deviations from the
original plan.
5. Engagement Issues - Review

• Review has the purpose of identifying previously unrecognised problems and
examining them along with the rest of the work carried out.
• Is the amount of evidence gathered sufficient or is further work required?
• Quality control can be achieved during the review stage by: 
1) Learn lessons from mistakes made 
2) Appraisal staff immediately after assignments to praise &/or constructively criticise
6. Monitoring
• Ensure new developments in standards and regulations are implemented
• Ensure CPD is kept up to date.
• Any breaches to monitoring system dealt with
 
54 aCOWtancy.com

lOMoARcPSD|6235581
7. Ethical Requirements
• Have procedures to comply with ethical requirements eg. independence
• Emphasise through leadership, education/training, monitoring and dealing with non-
compliance
• Have procedures to identify independence threats eg. prompt notification by
employees
• Ensure that firm is notified of breaches of ethical requirements promptly
Types Of Review
• Hot Reviews 
 
A ‘hot’ review is carried out before the audit report is signed. 
Performed by a suitably independent reviewer such as a senior manager (not part of the
management team). 
Listed company engagements must have a hot review as well as those of public interest
or with significant risks. 
It reviews the quality of the judgements made such as: 
• Is the firm independent?

• Are risk assessment judgements justified?
• Use of work outside the audit team.
• Have misstatements been correctly dealt with?
• Do working papers support the conclusions reached?
• Is the final engagement report justified in the circumstances?
• Cold Reviews
• A ‘cold’ review is a review carried out after the audit report is signed.
• It will be designed to identify problems in procedures and poor practice.
• The cold review should make recommendations for improvements.
55 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C1c) Evaluate the quality control procedures that are in place for a given firm.
Engagement Performance
Direction, Supervision and Performance
Directing the engagement team means telling them about:
1. Their ethical responsibilities 

Their need to plan and perform an audit with professional skepticism
2. The objectives of the work to be performed
3. The nature of the entity’s business
4. Risk-related issues
5. Problems that may arise
6. The detailed approach to the performance of the engagement
Supervision includes:
• Seeing if the team has enough time and competence to do their job 
Also whether they understand their instructions
• Addressing significant matters arising during the audit and modifying the plan
appropriately
• Identifying matters for consultation with experienced engagement team members
Reviews include:
• Ensuring that work of less experienced team members is reviewed by more experienced
ones
• Ensuring that significant matters have been raised for further consideration
• Appropriate consultations have happened
• The work performed supports the conclusions reached and is appropriately documented
56 aCOWtancy.com

lOMoARcPSD|6235581
The Engagement Partner’s Review of Work Performed
This involves timely reviews of the following:

1. Critical areas of judgment
2. Significant risks
Engagement Quality Control Review
Note the following:

• It helps to see if sufficient appropriate evidence has been obtained
• It is done throughout the audit so significant matters are promptly resolved before the
date of the auditor’s report.
• Documentation of the review may be completed after the auditor’s report (as part of the
assembly of the final audit file)
• The extent of the review depends on: 
1) The complexity of the audit 
2) If the entity is listed and 
3) The risk of an inappropriate auditor’s report
Assigning the Audit Team
You need to consider the team's competence and capabilities
This means looking at their:

1. Understanding of, and experience with, similar audits
2. Understanding of professional standards and regulations
3. IT expertise and any specialist accounting / auditing
4. Knowledge of the client's industry
5. Ability to apply professional judgment
6. Understanding of the firm’s quality control policies
57 aCOWtancy.com

lOMoARcPSD|6235581
Individual level of Quality Control
Individual Level Quality Control
ISA 220 Quality Control for Audits of Historical Financial Information specifies the following
quality control procedures that should be applied by the engagement team in individual
audit assignments.
Client acceptance procedures
There should be full documentation, and conclusion on, ethical and client acceptance
issues in each audit assignment.
The engagement partner should consider whether members of the audit team have
complied with ethical requirements, for example, whether all members of the team are
independent of the client.
Additionally, the engagement partner should conclude whether all acceptance procedures
have been followed, for example, that the audit firm has considered the integrity of the
principal owners and key management of the client.
Other procedures on client acceptance should include:
1. Obtaining professional clearance from previous auditors

2. Consideration of any conflict of interest
3. Money laundering (client identification) procedures.
• Establish the identity of the entity and its business activity e.g. by obtaining a
certificate of incorporation
• If the client is an individual, obtain official documentation including a name and
address, e.g. by looking at photographic identification such as passports and driving
licences
• Consider whether the commercial activity makes business sense (i.e. it is not just a
‘front’ for illegal activities)
58 aCOWtancy.com

lOMoARcPSD|6235581
• Obtain evidence of the company’s registered address e.g. by obtaining headed letter
paper
• Establish the current list of principal shareholders and directors.
Engagement team
Procedures should be followed to ensure that the engagement team collectively has the
skills, competence and time to perform the audit engagement.
The engagement partner should assess that the audit team, for example:
1. Has the appropriate level of technical knowledge

2. Has experience of audit engagements of a similar nature and complexity
3. Has the ability to apply professional judgement
4. Understands professional standards, and regulatory and legal requirements.
Direction
The engagement team should be directed by the engagement partner.

The planning meeting should be led by the partner and should include all people involved
with the audit.
There should be a discussion of the key issues identified at the planning stage.
Procedures such as an engagement planning meeting should be undertaken to ensure

that the team understands:
1. Their responsibilities
2. The objectives of the work they are to perform
3. The nature of the client’s business
4. Risk related issues
5. How to deal with any problems that may arise; and
59 aCOWtancy.com

lOMoARcPSD|6235581
Supervision
Supervision should be continuous during the engagement.

Any problems that arise during the audit should be rectified as soon as possible.
Attention should be focused on ensuring that members of the audit team are carrying out
their work in accordance with the planned approach to the engagement.
Significant matters should be brought to the attention of senior members of the audit team.
Review
The review process is one of the key quality control procedures.

All work performed must be reviewed by a more senior member of the audit team.
Reviewers should consider for example whether:

1. Work has been performed in accordance with professional standards
2. The objectives of the procedures performed have been achieved
3. Work supports conclusions drawn and is appropriately documented.
Consultation
Finally the engagement partner should arrange consultation on difficult or contentious

matters.
This is a procedure whereby the matter is discussed with a professional outside the
engagement team, and sometimes outside the audit firm.
Consultations must be documented to show:

1. The issue on which the consultation was sought; and
2. The results of the consultation.
60 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C2: Advertising, publicity, obtaining

professional work and fees
Syllabus C2a) Evaluate the appropriateness of publicity material including the use of the
ACCA logo and reference to fees.
Acceptable Advertising
They should inform and not try to impress
Generally they should not reflect badly on the member, the ACCA or the accounting
profession as a whole
Acceptable publicity includes:

1. Appointments and awards
2. Seeking employment or professional business
3. Professional directories
4. Books, article, interviews, lectures, media appearances
5. Training courses and seminars
Advertisements and promotional material must not:

1. Bring ACCA into disrepute
2. Discredit the services offered by others
3. Claim superiority
4. Mislead
5. Be legal, decent & truthful
61 aCOWtancy.com

lOMoARcPSD|6235581
Names & Descriptions
Members may be called Chartered Certified Accountants, but not companies
The firm may describe itself as ‘Chartered Certified Accountants’ if...

• At least half the partners or directors are ACCA members
• They control at least 51% of the voting rights
If all partners in the firm are ACCA members they may state this on their stationery.
If some partners are members of another accountancy body however, this must be made
clear.
Use of ACCA logo
Acceptable if:
• At least 1 partner is an ACCA member
• The logo is separate from the firm logo
62 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C2b) Outline the determinants of fee- setting and justify the bases on which
fees and commissions may and may not be charged for services.
Fees
The basis of calculation (e.g. hourly) must be clearly stated
Any reference to fees must not mislead the reader about the precise range of services and
time commitment that it relates to
You can compare your fee to others if..

1. It is for the same service
2. It is an objective comparison
3. It doesn't discredit the other
4. It doesn't create confusion
Percentage discounts may be offered but must not detract from the firm or the profession
Assurance Engagement Fees

• Not calculated on a % or contingency basis
• Due to self-interest and advocacy threats
Non-Assurance Engagement Fees

• Contingent fee possible only if possible range and variability of the fee is small
• Approval by the audit committee may be needed
Setting Fees
The following needs considering:
63 aCOWtancy.com

lOMoARcPSD|6235581
1. Level of expertise needed

2. Time needed
3. How important the work is to client
4. The risk of taking on the work & costs incurred
Syllabus C2c) Discuss the ethical and other professional problems, for example, lowballing, involved
in establishing and negotiating fees for a specified assignment.
Low-Balling
This is setting the initial audit fee low in order to win the client
Ethical Issues:
• Client needs to stay to recover the initial losses so independence is impaired
• Possibly unprofessional because many smaller practices can't compete
64 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C2d) Recognise and explain the matters to be considered prior to tendering for
an audit or other professional engagement and explain the information to be included in
the proposal.
Tendering
This is when an audit firm is approached by a prospective client to bid for

their audit
Audit Firm Considerations:

• How did the client get to know about them?
• Why has the firm been approached particularly?
• What is the scope of the audit?
• How risky is the audit to the firm?
• Does the firm have the necessary resources
Tender documents contents:

1. Fee and how it has been calculated
2. An assessment of the requirements of the prospective client
3. Our approach to the requirements
4. Deadlines and information needed
5. Outline of the firm and our staff
65 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus C3: Professional appointments
Syllabus C3a) Explain the matters to be considered and the procedures that an audit
firm/professional accountant should carry out before accepting a specified new client/
engagement or continuing with an existing engagement, including:
. i) client acceptance
. ii) engagement acceptance
. iii) establish whether the preconditions for an audit are present
. iv) agreeing the terms of engagement.  
Syllabus C3b) Recognise the key issues that underlie the agreement of the scope and
terms of an engagement with a client.
Accepting a new engagement
Auditors should screen clients to ensure they are not high risk
The risk to the auditor is ‘reputation risk’ i.e. that they will be associated with a poorly
regarded client.
An auditor is required under ISA 315 to gain an understanding of their client.

Auditors should screen clients to ensure they are not high risk
Questions to ask will be:

1. Is the client involved in any fraudulent/illegal activities?
2. What is the nature of the industry in which they are involved – is it depressed?
3. Has the client had a history of changing auditor regularly or had qualified audit reports
in the past?
4. Do client directors understand their role and are they able to carry it out?
5. Are management trustworthy?
66 aCOWtancy.com

lOMoARcPSD|6235581
Other Areas to help gain an understanding are:
• The market and its competition

• Legislation and regulation
• Regulatory framework
• Ownership of the entity
• Nature of products/services and markets
• Location of production facilities and factories
• Key customers and suppliers
• Capital investment activities
• Accounting policies and industry specific guidance
• Financing structure
• Significant changes in the entity on prior year
Auditors may advertise their services.
However, adverts should not bring the ACCA into disrepute, discredit the services of
others, be misleading, or fall short of regulatory or legislative requirements.
Procedures when offered a role
These include:
1. Get permission to contact the outgoing auditor
2. Contact the old auditor, asking for any reasons why we should not accept appointment
3. Check we are sufficiently Independent
4. Check we have the competence & resources to do it
Pre-Conditions for an Audit
Auditors should only accept a new audit engagement when it has been confirmed that the
preconditions for an audit are present..
67 aCOWtancy.com

lOMoARcPSD|6235581
• Is the FR framework acceptable? 

Consider the entity & the purpose of the FS  
Perhaps, also, laws say which FR framework should be used
• Do Management accept their responsibilities? 

For preparing FS  
For internal controls 
For giving the auditor all relevant information they request
If the preconditions for an audit are not present..

The auditor shall not accept the proposed audit engagement
68 aCOWtancy.com

lOMoARcPSD|6235581
New engagement process
Tendering for audit work
Things to consider...
1. Fee
A fee will be quoted for a piece of audit work before it is carried out under a tendering
process
The auditor must not lowball as we have seen above, nor may they make unrealistic
claims or promises to win the contract
2. Get Information
The potential client will inform the auditor of what is expected, the timetable, future
plans of the company and any problems with current auditor
3. Proposal 
The auditor may then draw up a proposal containing:
• Proposed audit fee
• Nature, purpose and legal requirements of an audit.
• Assessment of the requirements of the client.
• How audit firm proposes to satisfy requirements
• Any assumptions made.
• Proposed audit methodology.
• Outline of audit firm and personnel
• Ability of firm to perform the audit
Pre-conditions
Is the Financial framework used acceptable? (Consider the type of business and relevant
laws and the uses of the financial statements)
Client Decision
69 aCOWtancy.com

lOMoARcPSD|6235581
The client will decide on the basis of clarity, relevance, professionalism, reputation,
timeliness of delivery and originality which firm will conduct the audit
Engagement letter
An engagement letter is a letter from the auditor to the client indicating

various matters concerning the engagement
The engagement letter is sent before the audit to the client confirming their acceptance of
the audit.
Contents
ISA 210 Terms of Engagement gives guidance as to their content, but as a rule most will
include:
• The Objective of the audit.

• Managements’ responsibility for the Financial Statements.
• The scope of the audit including reference to legislation and professional standards.
• The form of report to be used
• Use of the work of internal audit
• Reference to inherent limitations of an audit
• Access to information to be allowed
• Deadlines and confidentiality
• Expectations of management representations
• Fees
• Complaints procedures
70 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D: AUDIT OF HISTORICAL

FINANCIAL INFORMATION
Syllabus D1: Planning, materiality and assessing the
risk of misstatement
Syllabus D1a) Define materiality and performance materiality and demonstrate how it
should be applied in financial reporting and auditing.
Materiality
ISA 320 defines information as material if ‘its omission or misstatement could

influence the economic decisions of users taken on the basis of the financial
statements.’
Material items could be large transactions or significant events.
Materiality is important to the auditor because if a material item is incorrect, the financial
statements will not show a ‘true and fair view.’
71 aCOWtancy.com

lOMoARcPSD|6235581
Materiality Levels
1. The auditor will decide materiality levels and design their audit procedures to ensure
that the risk of material misstatements is reduced to an acceptable level. 
Generally, materiality will be set with reference to the financial statements such as: 
0.5 – 1% of turnover
5 – 10% of profits reported
1 – 2 % of gross assets
 
Judgement will be used by the auditor in charge and will depend on the type of
business and the risks it faces. 
2. Considerations
Quantity 
The relative size of the item
Quality 
This might be something that's low in value but could still affect users' decisions e.g..
Directors wages
Tolerable Error
• This is when the auditor accepts the error
• For example finding one error out of 100 tested, might be ignored
• The tolerable level will be decided at planning stage
72 aCOWtancy.com

lOMoARcPSD|6235581
Performance Materiality
This is lower than normal materiality
The idea is that this will try to prevent all those small, undetected errors do not aggregate
to become material
There are now 2 standards to consider..

1. ISA 320 Audit Materiality
2. ISA 450 Evaluation of Misstatements Identified During the Audit
• As we know, materiality is calculated at the planning stage 

But it might not stay at that amount - oh no baby 
Things happen that make the auditor change the level 
Such things are often immaterial in quantity but material by their nature 
• Example 
The company you are auditing makes a $5,000 profit.  
The materiality is set at $10,000 
You notice that an invoice for $6,000 has been incorrectly placed into next year.  
This would be material as it changes the look of the whole accounts (changing a profit
into loss) 
• The new standard recognises that there could well be instances where certain classes of
transactions, account balances or disclosures might be affected by misstatements which
are less than the materiality level for the financial statements as a whole, but which may
well influence the decisions of the user of those financial statements regardless of the
fact they are below materiality – this is where performance materiality is to be applied.  
Specifically, the clarified ISA 320 suggests performance materiality be applied to areas
such as related party transactions and directors’ remuneration.
Syllabus D1b) Identify and explain business risks for a given assignment.
73 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1b) Evaluate business risks, audit risks and risks of material misstatement for
a given assignment.
Business Risk
The risk that the business won't meet its objectives
The objective is normally profit maximisation

So we are looking for problems which may impact on the business
To look for Risks..
You could use PESTEL
Business risk identification is literally putting yourself in the shoes of the management..
P - Political risks 
e.g. The current government may be unstable and if there is a change of government, the
new government may impose restrictions.
The Company will need to assess the likelihood of such restrictions.
E - Economic risks
S - Social and taste changes
T - Technological changes
E - Environmental issues
L - Legal issues
Financial Statement Risk
Simply the risk that the FS are materially misstated (before any audit procedures)
The risk comes from potential errors or deliberate misstatements
74 aCOWtancy.com

lOMoARcPSD|6235581
Business v Financial Risk

• Business risks will affect the FS if not addressed by management
• Business risks can lead to errors on specific areas of the FS (eg. Technological change
leading to obsolete stock)
• Business risk can have a more general effect on FS (eg. Poor controls leading to errors)
• Business risks can lead to going concern problems. This too would be a FS risk (wrong
basis of accounting)
75 aCOWtancy.com

lOMoARcPSD|6235581
Components of Audit Risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated
Stated another way, this is the risk that there is a material misstatement in the financial
statements, but the auditor misses it and says that they present a true and fair view.
Formula for audit risk is:

Inherent Risk x Control Risk x Detection Risk
Inherent Risk
This will be considered at the planning meeting as it depends on the auditors’ knowledge
of the business
Examples are…
• A cash based business

This is often a problem as there must be very strong controls in place if a business is a
cash based one. 
The auditor may feel that there are insufficient controls in place to mitigate this risk which
may lead to limitation of scope.
• Fast moving Industry

In fast moving industries such as IT or fashion there may be a risk that the inventory held
by the business becomes obsolete. 
The auditor may take expert advice on the valuation of inventory, or they may review
post year-end sales to ensure the goods are sold for more than they are valued at in the
financial statements.
Control Risk
This is the risk of material misstatement due to inadequate internal controls within the
business.
76 aCOWtancy.com

lOMoARcPSD|6235581
The auditor will make a judgement as to the suitability and strength of internal controls –
we will examine how this is done at a later stage.
Examples are...
• No segregation of duties
Segregation of duties is where different tasks in a process are performed by different
people e.g. an invoice is raised by one person and the cheque is written by another and
authorise by someone else. 
If this control is weak or not in place, the auditor may have to increase the sample size to
ensure the financial statements present a true and fair view.
• No controls over access to assets

If employees have unfettered access to the assets of the business with no restrictions,
this will increase the risk of theft or damage to those assets 
If the auditor finds this to be the case, more physical checks of the existence and
condition of assets will have to be carried out.
• No controls over access to IT

If a business does not use passwords and other protection to protect its’ computer
systems this can lead to data loss or manipulation without authorisation. 
If these controls are not in place the auditor will have to understand the system to assess
the ease of which it can be manipulated and check for anomalous trends using analytical
review. 
77 aCOWtancy.com

lOMoARcPSD|6235581
Detection Risk
This is the risk that the work carried out by the auditor does not uncover a material
misstatement that exists.
Detection risk can be split into sampling & non-sampling risk
Non-sampling risks
• The auditor did not sufficiently investigate a significant balance
• The procedures used may have been inappropriate or misinterpreted
Sampling risk
‘arises from the possibility that the auditor’s conclusion, based on a sample may be
different from the conclusion reached if the entire population were subjected to the same
audit procedure’. 
This is another way of saying that the sample selected by the auditor was not
representative of the data. 
Detection risk may be increased by things such as inexperienced audit staff or tight
deadlines to complete the audit.
78 aCOWtancy.com

lOMoARcPSD|6235581
Affecting Audit Risk
The auditor cannot affect inherent risk or control risk as these are internal
(called Entity Risk)
The auditor therefore concentrates on detection risk once they have assessed the control
and inherent risk.
Consider the elements of Audit risk and how they relate in our formula:
Inherent Risk x Control Risk x Detection Risk
If Inherent & Control risk are judged to be high, then to minimise overall audit risk, the
auditor must attempt to minimise detection risk.
The auditor will have to increase the amount of tests or the number of samples to ensure
that there is less chance of a material misstatement being overlooked or missed.
79 aCOWtancy.com

lOMoARcPSD|6235581
Evaluation of Misstatements
Material Misstatements normally lead to qualifying the audit report
Misstatements aren't just monetary figures, they could also be incorrect classification or
disclosures
Evaluating Misstatements
1. Get a list of misstatements found
2. Discuss these with management at the end of the audit
3. Management will normally correct these
4. Any remaining material misstatements will cause the auditor to qualify the report
Aggregation of Immaterial Errors

• Immaterial errors could aggregate to become material
• These will be brought to the attention of management
• If management amend material errors, then the auditor will issue an unqualified audit
report
• If management refuse to adjust the errors then the auditor must persuade them to do so
or issue a qualified audit report
All misstatements found must be communicated to those charged with governance
This is to ensure that no management bias exists in the decision taken on what constitutes
an ‘immaterial misstatement’
Management must also provide written representations that all uncorrected errors are
immaterial
80 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1c) Discuss and demonstrate the use of analytical procedures in the planning
of an assignment
Analytical Procedures in Planning
Analytical procedures consist of ‘evaluations of financial information through

analysis of plausible relationships among both financial and non-financial
data’
At the planning stage they help you understand the business and its environment
Because you compare figures to the industry and to previous years
Any items which go against the expected relationships help you assess the risk of material
misstatement
How to perform Analytical Procedures - A step by step guide
1. Predict a figure, based on a relationship 

Eg. This could be gross profit as a % of revenue (based on previous years and industry
averages)
2. Define what a significant difference is 

We call this the threshold below which we see any difference as just a tolerable 'error'
3. Calculate the procedure and the difference to the prediction in step 1
4. Investigate the difference 

Differences indicate an increased likelihood of misstatements 
If caused by factors previously overlooked, look at what impact this would have on the
original expectations as if this data had been considered in the first place, and to
understand any accounting or auditing ramifications of the new data 
81 aCOWtancy.com

lOMoARcPSD|6235581
Types of analytical procedures
Trend analysis  
The analysis of changes in an account over time
Ratio analysis  
The comparison of relationships using financial and non- financial data
Reasonableness testing  
Comparing expectations based on financial data, non-financial data, or both to actual
results
Limitations when used for Planning

1. Often budgets and forecasts needed
2. If done before Y/E extrapolations used - these aren't reliable if business is seasonal
3. Many accounting adjustments missed as only done at Y/E
4. Often uses less rigorous management accounts
5. Even more difficult for smaller companies who don't have good management accounts
82 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1d) Explain how the result of planning procedures determines the relevant
audit strategy.
Why Plan an Audit?
Plan the audit so that the engagement will be performed in an effective

manner
Time spent planning the audit to ensure it is carried out efficiently will reduce the time
taken and thus the cost.
The planning process will also assess and thus reduce risk.
The auditor will want to ensure that the correct team is in place to conduct the audit, they
are working efficiently and that work is focused on material areas of risk and potential
problem areas.
Planning Activities
• Risk Assessment
We will look in detail later at risk assessment, but at this point we should be aware that
the identification of risk will determine the entire audit process.
• Audit Strategy
The audit strategy sets out the scope, timing and direction of the audit.
The Scope:
The scope of the audit will be determined by the reporting framework applied as well as
any industry specific requirements.
The strategy decided upon will be tailored to the client and the nature of their business
and their structure. The auditor must ensure that the strategy selected is appropriate
83 aCOWtancy.com

lOMoARcPSD|6235581
If there are any geographical or other factors which may affect the audit, they will be
considered here
Timing:
The timing of the audit will set out any deadlines applicable and the dates of the interim
and final audit visits.
The interim audit is conducted before the final audit to evaluate controls and document
the systems in place.  
In addition there may be some substantive tests carried out.  
The attendance at the stock count will be carried out at this time and perhaps the
receivables circularisation.
The final audit will involve the bulk of the audit work and it may be possible to
concentrate on the statement of financial position figures if sufficient work has been
carried out during the interim audit.
Direction:
The direction of the audit will be determined by the identification of high risk areas and
materiality.
 
The strategy decided upon will be tailored to the client and the nature of their business
and their structure.
The auditor must ensure that the strategy selected is appropriate. 
84 aCOWtancy.com

lOMoARcPSD|6235581
Contents of the Plan
There are several stages in the planning process:
As follows
• Ensure understanding of the business
• Undertake analytical review
• Assess the risks involved with the business
• Establish materiality levels
• Establish tolerable error for material errors
• Decide the audit approach
• Ensure auditor independence
• Decide the budget and staff requirements
• Timetable the audit & set deadlines
Permanent file
The permanent file kept by the audit firm will bring forward a lot of the knowledge of the
business, but this must be kept up to date.
Current File
The current file contains the evidence and documents relevant to the current year.
The planning section of the file will cover all of the areas above, and there will be a
completion section which will review the audit.
In between there will be a sub-section for each balance sheet item (e.g. Non Current
Assets) and for each income statement item (e.g. purchases) with the work done outlined
and evidence documented
85 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1e) Explain the planning procedures specific to an initial audit engagement.
Initial Engagement
Opening Balances
Get evidence that:

1. No misstatements in them
2. Prior period c/f correctly 
Or restated if necessary
3. Accounting policies consistent 
If not then the comparative needs restating and disclosed
Prior Period Not Audited?
Procedures:
1. Check post Y/E cash for confirming opening receivables / payables
2. Do stock count and "roll back" to opening balance
3. Get 3rd party confirmation on other assets and liabilities
Prior period - Different Auditor
Audit procedures:
1. Review their working papers - for competence and independence
2. Check FS & audit report for information relevant to opening balances
3. If previous report modified - check it has been rectified now
Audit Report Possible Effects
Can’t get enough evidence about opening balances? “Except for” or “Disclaimer”
Opening balances or disclosures incorrect “Except for” or “Adverse”
86 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1f) Recommend additional information which may be required to assist the
auditor in obtaining an understanding of the entity.
How to get Initial Understanding
Firstly the auditor needs to understand the entity’s environment, this will
require the auditor to assess:
• Industry conditions
• Principle business strategies
• Competitors
• Laws and regulations
• Technology
• Stakeholders
• Financing
• Acquisitions and disposals
• Related parties
• Competence of management
• Accounting policies
From a number of sources..

1. Internal to the audit firm such as last years’ file.
2. External sources such as credit reference agencies.
3. Information provided by the client.
4. The auditor’s personal experience and knowledge
ISA 315 requires a planning meeting where ‘the members of the engagement team should
discuss the susceptibility of the entity’s financial statements to material misstatements.’
The minutes of this meeting should be documented as evidence of its occurrence.

Analytical procedures should be undertaken at this stage to establish an understanding of
the financial statements and draw attention to anomalies.
87 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D1g) Discuss how transnational audits may differ from other audits of historical
financial information (e.g. in terms of applicable financial reporting and auditing
standards, listing requirements and corporate governance requirements).
Transnational audits
Definition: A transnational audit means an audit of financial statements which are relied
upon outside the audited entity’s home jurisdiction for the purpose of significant lending,
investment or regulatory decisions.
So if a company is listed on the stock exchange of several countries, and is planning to

raise more finance, this means it is subject to the regulations of all stock exchanges on
which it is listed, and so is bound by listing rules outside of its home jurisdiction
The Forum of Firms (FOF, Forum) is an independent association of international

networks of firms that perform transnational audits.
The objective of the Forum is to promote consistent and high-quality standards of financial
reporting and auditing practices worldwide—bringing together firms that perform
transnational audits and involving them more closely with IFAC’s activities in audit and
other assurance-related areas.
Members of the FoF must demonstrate their commitment to adhere to and promote the
consistent application of high-quality audit practices worldwide, as detailed in the FOF
Constitution
Transnational Auditors Committee

The IFAC Transnational Auditors Committee (TAC) serves as the official link between IFAC
and the Forum of Firms. It is broadly responsible for implementing and advancing the
FoF’s objectives and operations, and plays a major role in encouraging members of the
FoF to conduct high-quality international audits by requiring the commitment to comply
with certain international standards as a condition of membership.
The TAC also supports audit quality by:

◦ Identifying audit practice issues and making recommendations to the
appropriate standard-setting boards to review these issues as needed;
◦ Providing a forum to discuss best practices in areas including quality control,
auditing, independence, and training and continuing professional development;
◦ Facilitating interaction among transnational firms, international regulators,
and financial institutions with regard to audit quality, systems of quality control, and
transparency of international networks; and
◦ Identifying qualified candidates to serve on the international standard-setting
boards.
88 aCOWtancy.com

lOMoARcPSD|6235581
Transnational audit and audit risk
Application of auditing standards
Although many countries of the world have adopted International Standards on Auditing
(ISAs), not all have done so, choosing instead to use locally developed auditing
regulations.
In addition, some countries use modified versions of ISAs.
This means that in a transnational audit, some components of the group financial
statements will have been audited using a different auditing framework, resulting in
inconsistent audit processes within the group, and potentially reducing the quality of the
audit as a whole.
Regulation and oversight of auditors
Across the world there are many different ways in which the activities of auditors are
regulated and monitored. In some countries the audit profession is self-regulatory,
whereas in other countries a more legislative approach is used.
This also can impact on the quality of audit work in a transnational situation.
Financial reporting framework
Some countries use IFRS, whereas some use locally developed accounting standards.
Within a transnational group it is likely that adjustments, reconciliations or restatements

may be required in order to comply with the requirements of the jurisdictions relevant to
the group financial statements (i.e. the jurisdiction of the parent company in most cases).
89 aCOWtancy.com

lOMoARcPSD|6235581
Such reconciliations can be complex and require a high level of technical expertise of the
preparer and the auditor
Corporate governance requirements and consequent control risk
In some countries there are very prescriptive corporate governance requirements, which
the auditor must consider as part of the audit process.
In this case the auditor may need to carry out extra work over and above local
requirements in order to ensure group wide compliance with the requirements of the
jurisdictions relevant to the financial statements.
However, in some countries there is very little corporate governance regulation at all and
controls are likely to be weaker than in other components of the group.
Control risk is therefore likely to differ between the various subsidiaries making up the
group 
90 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D2: Evidence
Syllabus D2a) Identify and describe audit procedures (including substantive and tests of
controls) to obtain sufficient appropriate evidence from identified sources to support the
financial statement assertions and disclosures.
D2c) Recommend additional information which may be required to effectively carry out a
planned engagement or a specific aspect of an engagement.
The Assertions Explained
Assertions are used for transactions, balances and disclosures to see if

sufficient evidence on them has been collected
The assertions help assess risks
They help the auditor consider potential misstatements and so design audit procedures for
those particular risks.
Transactions Assertions
1. Occurrence
2. Completeness
3. Accuracy
4. Cut-off
5. Classification
Y/E Balances Assertions

1. Existence
2. Rights and obligations
91 aCOWtancy.com

lOMoARcPSD|6235581
3. Completeness
4. Valuation and allocation
Disclosures Assertions
1. Occurrence
2. Completeness
3. Classification and understandability
4. Accuracy and valuation 
92 aCOWtancy.com

lOMoARcPSD|6235581
Procedures for obtaining evidence
Just remember A,E,I,O and U
So here's a reminder...
1. Analytical Procedures
2. Enquiry
3. Inspection
4. Observation
5. Re-calcUlation / Re-performance
Procedure Meaning Control test Substantive test
Analytical procedure Exploring relationships Comparing yearly gross

between data margins
Enquiry Getting information from Replies from a debtors

3rd party circular
Inspection Examining records Signature as evidence Getting title deeds to a

property
Observation Looking at process Watching staff complete

their attendance sheet
Re-calculation Checking mathematical Adding individual sales

accuracy in the sdb to check the
totals
Using Assertions
So the assertions need testing to see if they're true
This is done by
1. Inspection
This means a physical examination
Things to inspect include: documentation, contracts, records and minutes.
93 aCOWtancy.com

lOMoARcPSD|6235581
It also includes physical examination of the assets.  

This enables the auditor to verify the existence (though not ownership) of them
2. Observation
This means watching others perform a procedure
Examples include observation of  
Payment of wages 
Inventory counts 
Opening mail
It gives assurance that official procedures are followed
3. Inquiry
This means getting information from people inside or outside the entity.
It can be a formal written or an oral inquiry
4. Confirmation
This means corroborating evidence from third parties with the internal evidence
For example, confirming accounts receivables by circularising the debtors
5. Re-Performance
This can be recalculating figures or re-counting stock etc
6. Analytical Procedures
This is the analysis of ratios and trends
It includes investigating fluctuations between current and previous performance and

check whether other information is consistent with such relationship.
For example, comparing the rent charge from one period to the next and see if other
evidence such as number of rental properties corroborates the increase or decrease
94 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D2b) Assess and describe how IT can be used to assist the auditor and
recommend the use of Computer-assisted audit techniques (CAATs) and data analytics
where appropriate.
Using CAATs
CAATs use a computer to assist the auditor in testing during the audit
procedures
There are 2 categories of CAAT:
1. Audit Software
2. Test Data
Audit Software
The auditor may use audit software to run the client data to check for errors
It can be an off-the-shelf software or bespoke for the client.
They can scrutinise large volumes of data, whose results can be investigated further
The software does not, however, replace the need for the auditor's own procedures
95 aCOWtancy.com

lOMoARcPSD|6235581
It can do the following:
select a sample using different sampling techniques
check calculations
automate the confirmation letter process
produce reports
follow transactions
Test Data
Another method which may be used by the auditor is the use of test data.
This is really putting a dummy transaction through the system to ensure that controls are
working and that calculations are performed correctly
Examples of errors
Codes don't actually exist, e.g. customer, supplier and employee;
Transactions above pre-set limits, e.g. credit limits
Invoices with arithmetical errors
96 aCOWtancy.com

lOMoARcPSD|6235581
Auditing around the computer
Meaning the auditor does not audit how the computer works, but rather checks that the
inputs generate the expected outputs from the system
This increases audit risk as the auditor cannot tell with certainty whether the
internal processes of the system are working correctly
It is very difficult to determine why errors occurred 
Also fixing them may need an external expert
Advantages & Disadvantages of CAATs

• Advantages
1. Independently access computer data

2. Test the reliability of client software
3. Increase the accuracy of audit tests
4. Perform audit tests more efficiently
• Disadvantages
1. CAATs can be expensive and time consuming to set up

2. Client permission and cooperation may be difficult to obtain
3. Potential incompatibility with the client's computer system
4. The audit team may not have sufficient IT skills
5. Data may be corrupted or lost during the application of CAATs
97 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D2d) Apply the further considerations and audit procedures relevant to initial
engagements.
Initial Engagements
This is when an Auditor takes on a new engagement
Things to Consider:
1. Previous audit qualified? 

If so, ensure that the matter was resolved
2. Any audit adjustments in previous year? 

Ensure made in the client’s accounting system as well as the final accounts
3. Were the accounts audited last year? 

Carry out some work to ensure happy with the opening position
By consulting with management and reviewing the systems in place the auditor may not
have to carry out substantive procedures, but if these are unsatisfactory then substantive
procedures may be required
98 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D2e) Apply analytical procedures to financial and non-financial data.
Analytical procedures
Substantive procedures help detect material misstatement or fraud at the

assertion level
There are two categories of substantive procedures - analytical procedures* and tests of
detail.
*Analytical procedures generally provide less reliable evidence than the tests of detail
AP's are used at different times in the audit whereas tests of detail are only applied in the
substantive testing stage
Analytical procedures are compulsory at two stages of the audit under ISA 520:
1. The planning stage &
2. The review stage
Analytical procedures use calculations such as financial ratios to generate an expectation

of what a figure is likely to be and then comparing this to the actual figure in the accounts.
They can be used to highlight unusual figures in order to focus the audit on them or to
establish that a trend has continued.
99 aCOWtancy.com

lOMoARcPSD|6235581
The financial ratios used by the auditor will fall into 3 general categories:
Profitability/Return
1. Gross Margin
2. Net Margin
3. ROCE
Liquidity/Efficiency
1. Receivables/Payables/Inventory Days
2. Current Ratio
3. Quick Ratio
Gearing
1. Financial Gearing
2. Operational Gearing
Whether or not the auditor relies on analytical procedures as substantive

procedures depends on four factors:
• Suitability
Analytical procedures will not be suitable for every assertion
• Reliability
The auditor may only rely on data generated from a system with strong controls
• Degree of Precision
Some figures will not have a recognisable trend over time or be comparable
• Acceptable Variation
Variations having an immaterial impact on the financial statements will not hold as much
interest to the auditor as those that do
100 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D2f) Explain the specific audit problems and procedures concerning related
parties and related party transactions.
Syllabus D2g) Recognise circumstances that may indicate the existence of unidentified
related parties and select appropriate audit procedures.
IAS 24 Related Parties
A party is said to be related to an entity if any of the following three situations

occur:
The 3 situations are:

1. Controls / is controlled by entity
2. is under common control with entity
3. has significant influence over the entity
Types of related party

These therefore include:
1. Subsidiaries
2. Associate
3. Joint venture
4. Key management
5. Close family member of above
6. A post-employment benefit plan for the benefit of employees
Not necessarily related parties

• Two entities with a director in common
• Two joint venturers
• Providers of finance
• A big customer, supplier etc
101 aCOWtancy.com

lOMoARcPSD|6235581
Stakeholders need to know that all transactions are at arm´s length and if not then be fully
aware.
Similarly they need to be aware of the volume of business with a related party, which
though may be at arm´s length, should the related party connection break then the volume
of business disappear also.
Disclosures
• General
The name of the entity’s parent and, if different, the ultimate controlling party
The nature of the related party relationship
Information about the transactions and outstanding balances necessary for an
understanding of the relationship on the financial statements
• As a minimum, this includes: 

Amount of outstanding balances
Bad and doubtful debt information 
• Key management personnel compensation should be broken down by:

• short-term employee benefits
• post-employment benefits
• other long-term benefits
• termination benefits
• share-based payment
Group and Individual accounts
1. Individual accounts 
Disclose related party transactions / outstanding balances of parent, venturer or
investor. 
2. Group accounts 
The intra- group transactions and balances would have been eliminated. 
102 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Related Parties
Understanding RP relationships and transactions is vital
This is because:
1. Need to recognise possible fraud risk factors
2. Need to show fair presentation
3. Need to ensure RPs identified, accounted for and disclosed
Auditors need to..

• Know the indicators of RP existence (not identified by managers)  
e.g. complex structures
• Records/documents that may indicate related parties
• See the importance management place on identifying, accounting for and disclosing RPs
• Understand the risk of management override of RPs controls
Review
1. P/Y working papers for names of known RPs
2. Shareholder records/share register
3. Income tax returns
4. Records of investments and senior management pension plans
5. Internal auditors' reports
Examples include:
An unusually high turnover of senior management
The use of business intermediaries for significant transactions
Evidence of the RPs excessive participation in selecting accounting policies
Auditing IDENTIFIED Related Parties

1. Confirm terms, conditions and amounts with the RPs
2. Inspect evidence of appropriate authorisation
3. Confirm or discuss with relevant independent persons (e.g. banks, lawyers)
4. Review RPs FS for related party disclosures made 
103 aCOWtancy.com

lOMoARcPSD|6235581
If transactions are OUTSIDE normal course of business

• Evaluate business rational
• Do management explanations make sense
• Accounting and disclosure is in accordance with the reporting framework
• Authorisation is appropriate
What if we find an RP that management didn't tell us about?

1. Tell the engagement team
2. Get management to identify all transactions with the RP
3. Ask why management controls failed to recognise them
4. Perform appropriate substantive audit procedures
5. Reconsider risk of other RPs not told about & perform additional procedures
6. If intentional - evaluate the implications for the audit (e.g. management's integrity etc)
Tell Those charged with governance about:

Management failure to disclose information
Disagreement with management regarding RP accounting and disclosure
Non-compliance with laws and regulations
Difficulties in identifying the party that ultimately controls the entity
Effect on Auditor's Opinion

1. Disagreement if disclosures are inadequate
2. Limitation of scope if insufficient information
Limitation of Scope if...

1. Management give identifying RP low importance
2. Lack of appropriate oversight by those charged with governance
3. Intentional disregard to controls because disclosures would be sensitive
4. Poor management understanding of RP accounting and disclosures needed
5. The absence of disclosure requirements under the applicable financial reporting
framework 
104 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D3: Evaluation and review
Syllabus D3a) Design appropriate audit procedures and evaluate the matters (e.g.
materiality, risk, relevant accounting standards, audit evidence) relating to:
- inventory
Inventory
Value at
• Lower of cost and net realisable value
Remember to take future costs away from selling price and NOT add to costs
Questions relating to the physical inventory count:

1. Are all items marked when counted?
2. Does a management carry out test checks?
3. Are stock-sheets pre-numbered and prepared in ink?
4. Is a complete set of stock-sheets available covering all categories of inventory?
105 aCOWtancy.com

lOMoARcPSD|6235581
- changes in accounting policy
Changes in Accounting Policy
Changes in accounting policy
Change comparatives also
Changes in accounting estimates
Just change this year and not comparatives
106 aCOWtancy.com

lOMoARcPSD|6235581
. - taxation (including deferred tax)
Deferred tax basics
Deferred tax is all about matching.
If the accounts show the income, then they must also show any related tax.
This is normally not a problem as both the accounts and taxman often charge amounts in
the same period
The problem occurs when they don’t.
We saw how the accounts may show income when the performance occurs, while the
taxman only taxes it (tax base) when the money is received.
In this case, as financial reporters we must make sure we match the income and related
expense.
So this was a case of the accounts showing ‘more income’ then the tax man in the current
year (he will tax it the following year when the money is received).
So we had to bring in ‘more tax’ ourselves by creating a deferred tax liability
Hopefully you can see then that the opposite also applies:
Difference Tax effect Deferred Tax
More expense in I/S less tax needed Asset
Double entry
Dr Deferred tax asset
Cr Tax (I/S)
107 aCOWtancy.com

lOMoARcPSD|6235581
In fact, the following table all applies:
Difference Tax effect Deferred Tax
More income More tax Liability
Less income Less tax Asset
More expense Less tax Asset
Less expense More tax Liability
Remember this more income etc is from the point of view of IFRS.
The accounts are showing more income, as the taxman does not tax it until next year
Principal audit procedures – recoverability of deferred tax asset

1. Obtain a copy of current tax computation and deferred tax calculations and agree
figures to any relevant tax correspondence and/or underlying accounting records.
2. Develop an independent expectation of the estimate to corroborate the reasonableness
of management’s estimate.
3. Obtain forecasts of profitability and agree that there is sufficient forecast taxable profit
available for the losses to be offset against.
4. Evaluate the assumptions used in the forecast against business understanding.  
In particular consider assumptions regarding the growth rate of taxable profit in light of
the underlying detrimental trend in profit before tax.
5. Assess the time period it will take to generate sufficient profits to utilise the tax losses.  
If it is going to take a number of years to generate such profits, it may be that the
recognition of the asset should be restricted.
6. Using tax correspondence, verify that there is no restriction on the ability of Company
to carry the losses forward and to use the losses against future taxable profits.
108 aCOWtancy.com

lOMoARcPSD|6235581
. - segmental reporting
IFRS for SME - Introduction

The principal aim when developing accounting standards for small-to medium-sized
enterprises (SMEs) is to provide a framework that generates relevant, reliable and useful
information, which should provide a high-quality and understandable set of accounting
standards suitable for SMEs.
The only real users of accounts for SMEs are:
1) Shareholders
2) Management
3) Possibly government

IFRS for SMEs is a self-contained standard, incorporating accounting principles based on
existing IFRS, which have been simplified to suit SMEs.
If a topic is not covered in the standard there is no mandatory default to full IFRS.
Topics not really required for SMEs are excluded and so the standard does not address
the following topics:
• Earnings per share

• Interim financial reporting
• Segment reporting
• Insurance (because entities that issue insurance contracts are not eligible to use the
standard)
• Assets held for sale.
109 aCOWtancy.com

lOMoARcPSD|6235581
Good news! The standards are relatively short and get the preparers to think. IFRS for
SMEs therefore contains concepts and pervasive principles, any further disclosures may
be needed to give a true and fair view. It will be updated once every 2 or 3 years only.

What is an SME?
There is no universally agreed definition of an SME. As there are differences between
firms, sectors, or countries at different levels of development.
Most definitions based on size use measures such as number of employees, balance
sheet total, or annual turnover. However, none of these measures apply well across
national borders.
Ultimately, the decision regarding who uses IFRS for SMEs stays with national regulatory
authorities and standard-setters. These bodies will often specify more detailed eligibility
criteria. If an entity opts to use IFRS for SMEs, it must follow the standard in its entirety – it
cannot cherry pick between the requirements of IFRS for SMEs and the full set.

Different users entirely
IFRS users are the capital markets. So, quoted companies and not SMEs.
The vast majority of the world's companies are small and privately owned, and it could be
argued that full International Financial Reporting Standards are not relevant to their needs
or to their users.
It is often thought that small business managers perceive the cost of compliance with
accounting standards to be greater than their benefit.
Because of this, the IFRS for SMEs makes numerous simplifications to the recognition,
measurement and disclosure requirements in full IFRS.
Examples of these simplifications are:

Goodwill and other indefinite-life intangibles are amortised over their useful lives, but if
useful life cannot be reliably estimated, then 10 years.
110 aCOWtancy.com

lOMoARcPSD|6235581
A simplified calculation is allowed if measurement of defined benefit pension plan

obligations (under the projected unit credit method) involve undue cost or effort.
The cost model is permitted for investments in associates and joint ventures.
Differing approaches
Some argue having 2 sets of rules may mean 2 true and fair views
Local GAAP for SME?

An alternative could have been for GAAP for SMEs to have been developed on a national
basis, with IFRS focusing on accounting for listed company activities.
Then though, SMEs may not have been consistent and may have lacked comparability
across national boundaries.
Also, if an SME wished to later list its shares on a capital market, the transition to IFRS
could be harder.

List SME exemptions in the full IFRS?

Under another approach, the exemptions given to smaller entities would have been
prescribed in the mainstream accounting standard.
For example, an appendix could have been included within the standard, detailing those
exemptions given to smaller enterprises.
Separate SME standard for each IFRS?

Yet another approach would have been to introduce a separate standard comprising all the
issues addressed in IFRS that were relevant to SMEs.
 
111 aCOWtancy.com

lOMoARcPSD|6235581
As it stands now
User friendly
The standard has been organised by topic with the intention of being user-friendlier for
preparers and users of SME financial statements
The standard also contains simplified language and explanations of the standards.
Easier transition to full IFRS

It is based on recognised concepts and pervasive principles and it allows easier transition
to full IFRS if the SME later becomes a public listed entity.
In deciding on the modifications to make to IFRS, the needs of the users have been taken
into account, as well as the costs and other burdens imposed upon SMEs by the IFRS.

Cost Benefit
Relaxation of some of the measurement and recognition criteria in IFRS had to be made in
order to achieve the reduction in these costs and burdens.
Stewardship not so important

Small companies pursue different strategies, and their goals are more likely to be survival
and stability rather than growth and profit maximisation.
The stewardship function is often absent in small companies, with the accounts playing an
agency role between the owner-manager and the bank.
Access to capital
Where financial statements are prepared using the standard, the basis of presentation
note and the auditor's report will refer to compliance with IFRS for SMEs.
This reference may improve SME's access to capital.
112 aCOWtancy.com

lOMoARcPSD|6235581
In the absence of specific guidance on a particular subject, an SME may, but is not
required to, consider the requirements and guidance in full IFRS dealing with similar
issues.
The IASB has produced full implementation guidance for SMEs.
IFRS for SMEs is a response to international demand from developed and emerging
economies for a rigorous and common set of accounting standards for smaller and
medium-sized enterprises that is much easier to use than the full set of IFRS.
It should provide improved comparability for users of accounts while enhancing the overall
confidence in the accounts of SMEs, and reduce the significant costs involved in
maintaining standards on a national basis.
113 aCOWtancy.com

lOMoARcPSD|6235581
- non-current assets
Non Current Assets - Cost
This is recorded initially and then fixed
Costs to include are:

All directly attributable costs (e.g. P&P)
All future OBLIGATED costs (at Present value)
Borrowing costs (if takes a reasonable length of time to construct)
Future obligated costs

Dr Cost
Cr Liability
The liability must then be unwound

Dr Interest (I/S) 
Cr Liability
Auditing PPE additions

1. A breakdown of the components of the amount capitalised costs to ensure all items
are eligible for capitalisation.
2. Agreement of a sample of the capitalised costs to supporting documentation
3. A copy of the approved budget for any capital expenditure plan
4. Documentation to verify when constructed assets are complete and ready for use
5. Recalculation of the borrowing cost, depreciation charge and carrying value of the
extension at the year end, and agreement of all figures to the draft financial statements
6. Confirmation that the additions to PPE are disclosed in the required note to the
financial statements 
114 aCOWtancy.com

lOMoARcPSD|6235581
Non-current Assets - Depreciation
Quite straightforward but a reminder..
2 main methods
Straight Line 
(Cost - RV) / UEL
Reducing Balance 
NBV x depreciation rate
The RV and UEL should be kept up to date each year
Any changes made prospectively (i.e. no changing of comparatives)
A change in depreciation policy is actually only a change in accounting estimate not policy
So again changes only made prospectively
On a revaluation - check that all accumulated depreciation on that asset has been cleared
to zero
115 aCOWtancy.com

lOMoARcPSD|6235581
Non-current Assets - Revaluation
Increase goes to OCI and RR
Basic double entry steps:

Dr Accumulated depreciation 
Cr Revaluation Reserve
Dr Cost 
Cr Revaluation reserve
An impairment downwards after a revaluation

Dr the revaluation reserve first 
then 
Dr the Income statement
Keep the revaluations up to date
So change only when necessary (not always every year)
116 aCOWtancy.com

lOMoARcPSD|6235581

- impairment
Non-current Assets - Impairments
Impair if Recoverable amount is lower than carrying value
Recoverable amount
is higher of...
Value in Use  
The PV of future cash flows
FV less Costs to sell
Only check for impairment when theres been an indicator
eg
Damage
Loss of key employees
MV fall
Fall in interest rates
Order for impairment

1. Goodwill
2. All other non current assets pro rata to their carrying values
117 aCOWtancy.com

lOMoARcPSD|6235581
. viii) fair value
Fair Value Audit 
118 aCOWtancy.com

lOMoARcPSD|6235581
- leases
Leases - Introduction
There are 2 types of lease - an Operating and a Finance lease
In simple terms, a finance lease is where the LESSEE takes the majority of the risks and
rewards of the underlying asset
Therefore with a finance lease the lessee would show the asset on their SFP (and the
related finance lease liability)
When classifying look for substance rather than the form
Finance Lease Indicators

• The lessee gets ownership of the asset at the end of the lease term
• The lessee can buy the asset at such a low price that it is reasonably certain that the
option will be exercised;
• The lease term is for the major part of the economic life
• The PV of the lease payments is substantially the fair value of the leased asset; and
• Only the lessee can use the asset as it is so specialised
Other possible finance lease indicators

• If the lessee cancels the lease, he has to pay the lessor’s losses
• The lessee gets any residual value gains/losses and
• The lessee can lease for a secondary period at a cheap rent
Land & Buildings

Normally separately classified
119 aCOWtancy.com

lOMoARcPSD|6235581
The minimum lease payments are allocated between the land and buildings elements in
proportion to their relative fair values.
• Land = Operating lease (unless title passes to the lessee at the end of the lease term)
• Buildings = Operating or finance lease (by applying the classification criteria in IAS 17) 
120 aCOWtancy.com

lOMoARcPSD|6235581
Sale and Leaseback
If we sell an item and lease it back - have we actually sold it? Have we got rid
of the risk and rewards?
Well if we finance lease it back - it means we keep the risks and rewards - so in effect - we
have NOT sold it
If we operating lease it back - we have transferred the risks and rewards so an effective
sale has been made
Finance Lease Back
Do not recognise a profit or loss on the disposal and continue to recognise the asset in the
statement of financial position.
Any apparent profit (FV - CV) should be deferred and amortised over the lease term.
Accounting treatment
The accounting entries are:
Step 1 
• De-recognise the carrying amount of the asset now sold Cr Asset 
• Recognise the sales proceeds Dr Cash 
• Calculate the profit on sale (proceeds less carrying amount) Cr Deferred Income
Step 2 
• Recognise the finance lease asset Dr Asset and the associated liability Cr Finance
lease liability at the lower of FV and PV of MLP as usual
Step 3 
• Amortise the profit on sale as income over the lease term Dr. Deferred Income Cr.
Income statement
121 aCOWtancy.com

lOMoARcPSD|6235581
Operating Lease Back
• A normal sale 
If it’s a ‘normal’ profit then there’s no problem - just show it in the income statement.
Then show the operating lease rentals and that’s it. 
A normal sale is where the sale price = Fair Value
• Not normal sales - Selling Price less than Fair Value  

If Operating lease rentals < market rate 
So we simply take the “loss” and instead of hitting the income statement with it
immediately, we hold it in the SFP and take it to the income statement over the length of
the operating lease.  
This should have the effect of making the lease rentals in the income statement show at
the true market rate
• Not normal sales - Selling Price greater than Fair Value  

Again you must ask yourself why did we receive more? If theres no reason then be
happy and show the whole profit in the income statement immediately.  
If Operating lease rentals > market rate 
So here we do not take the profit to the income statement immediately but take the extra
above FV and take it to the SFP and hold it there.  
We then take it to the income statement over the length of the lease. This should have
the effect of reducing the future operating lease rentals to the market rate
Audit procedures - for the Exam

1. Classification of the lease - is it FL or OL?
2. State a correct accounting entry.
3. Is the effect of the error material to FS?
4. An adjustment should be made and, if not, the audit firm should consider the
implication for the auditor’s opinion
5. In future accounting periods, depreciation should be calculated based on the NEW
carrying value of the asset allocated over the remaining life and the deferred income
should be amortised over the same period. 
122 aCOWtancy.com

lOMoARcPSD|6235581
Audit Evidence
• A copy of the lease, signed by the lessor
• A copy of insurance documents where appropriate
• Physical inspection of the property complex
• Confirmation of the fair value of the property complex, possibly using an auditor’s expert.
• Agreement of the cash proceeds to bank statement and cash book.
• A schedule showing the adjustment required in the financial statements.
• Minutes of a discussion with management regarding the accounting treatment and
including an auditor’s request to amend the financial statements.
123 aCOWtancy.com

lOMoARcPSD|6235581
- revenue from contracts with customers
Revenue Recognition - IFRS 15 - introduction
Revenue Recognition - IFRS 15
When & how much to Recognise Revenue?
Here you need to go through the 5 step process…
1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation
Before we do that though, let’s get some key definitions out of the way..
Key definitions
• Contract 
An agreement between two or more parties that creates enforceable rights and
obligations.
• Income 
Increases in economic benefits during the accounting period in the form of increasing
assets or decreasing liabilities
124 aCOWtancy.com

lOMoARcPSD|6235581
• Performance obligation 
A promise in a contract to transfer to the customer either: 
- a good or service that is distinct; or  
- a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
• Revenue 
Income arising in the course of an entity’s ordinary activities.
• Transaction price 
The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer.
Revenue Recognition - IFRS 15 - 5 steps
Revenue Recognition - IFRS 15 - 5 steps
Ok let’s now get into a bit more detail…
Step 1: Identify the contract(s) with a customer

• The contract must be approved by all involved
• Everyone’s rights can be identified
• It must have commercial substance
• The consideration will probably be paid
Step 2: Identify the separate performance obligations in the contract

This will be goods or services promised to the customer
These goods / services need to be distinct and create a separately identifiable obligation
• Distinct means: 
The customer can benefit from the goods/service on its own AND 
The promise to give the goods/services is separately identifiable (from other promises)
125 aCOWtancy.com

lOMoARcPSD|6235581
• Separately identifiable means: 

No significant integrating of the goods/service with others promised in the contract  
The goods/service doesn’t significantly modify another good or service promised in the
contract.  
The goods/service is not highly related/dependent on other goods or services promised
in the contract.
Step 3: Determine the transaction price

How much the entity expects, considering past customary business practices
• Variable Consideration 
If the price may vary (eg. possible refunds, rebates, discounts, bonuses, contingent
consideration etc) - then estimate the amount expected
• However variable consideration is only included if it’s highly probable there won’t need to
be a significant revenue reversal in the future (when the uncertainty has been
subsequently resolved)
• However, for royalties from licensing intellectual property - recognise only when the
usage occurs
Step 4: Allocate the transaction price to the separate performance obligations
If there’s multiple performance obligations, split the transaction price by using

their standalone selling prices. (Estimate if not readily available)
• How to estimate a selling Price 

- Adjusted market assessment approach  
- Expected cost plus a margin approach  
- Residual approach (only permissible in limited circumstances).
• If paid in advance, discount down if it’s significant (>12m)
126 aCOWtancy.com

lOMoARcPSD|6235581
Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
Revenue is recognised as control is passed, over time or at a point in time.
• What is Control 
It’s the ability to direct the use of and get almost all of the benefits from the asset.  
This includes the ability to prevent others from directing the use of and obtaining the
benefits from the asset.
• Benefits could be: 

- Direct or indirect cash flows that may be obtained directly or indirectly 
- Using the asset to enhance the value of other assets;  
- Pledging the asset to secure a loan 
- Holding the asset.
• So remember we recognise revenue as asset control is passed (obligations satisfied) to

the customer 
 
This could be over time or at a specific point in time.
Examples (of factors to consider) of a specific point in time:

1. The entity now has a present right to receive payment for the asset;
2. The customer has legal title to the asset;
3. The entity has transferred physical possession of the asset;
4. The customer has the significant risks and rewards related to the ownership of the
asset; and
5. The customer has accepted the asset.
Contract costs - that the entity can get back from the customer
These must be recognised as an asset (unless the subsequent amortisation would be less
12m), but must be directly related to the contract (e.g. ‘success fees’ paid to agents).
127 aCOWtancy.com

lOMoARcPSD|6235581
Examples would be direct labour, materials, and the allocation of overheads - this asset is
then amortised
Revenues - Presentation in financial statements
Presentation in financial statements
Show in the SFP as a contract liability, asset, or a receivable, depending on when paid and
performed
i.e.. Paid upfront but not yet performed would be a contract liability
Performed but not paid would be a contract receivable or asset

1. A contract asset if the payment is conditional (on something other than time)
2. A receivable if the payment is unconditional
Contract assets and receivables shall be accounted for in accordance with IFRS 9.
Disclosures
All qualitative and quantitative information about:

• its contracts with customers;
• the significant judgments in applying the guidance to those contracts; and
• any assets recognised from the costs to fulfil a contract with a customer.
128 aCOWtancy.com

lOMoARcPSD|6235581
- employee benefits
Pensions Introduction
Objective of IAS 19
Companies give their employees benefits - the most obvious being wages but there are, of
course, other things they may offer such as pensions
IAS 19 says that the benefit should be shown when earned rather than when paid
Employee benefits include paid holiday, sick leave and free or subsidised goods given to
employees
Short-term Employee Benefits

As we mentioned above, any benefits payable within a year after the work is done, (such
as wages, paid vacation and sick leave, bonuses etc) should be recognised when the work
is done not when paid for
Profit-sharing and Bonus Payments
Recognise when there is an obligation to make such payments and a reliable estimate of
the expected cost can be made
Illustration
Grazydays PLC give their employees 6 weeks of paid holiday each year, and because
they’re groovy employers, any holiday not taken can be carried forward to the next year.
Accounting Treatment  
Any untaken holiday entitlement should be recognised as a liability in the current year
even though it wouldn’t be taken until the next year
129 aCOWtancy.com

lOMoARcPSD|6235581
Types of Post-employment Benefit Plans

There are two types:
1. Defined Contribution plan 

In this one the company just promises to pay fixed contributions into a pension fund for
the employee and has no further obligations 
The contribution payable is recognised in the income statement for that period 
If contributions are not payable until after a year they must be discounted
2. Defined Benefit plan 

This is a post-employment benefit that gives the company an obligation to pay a
defined pension to its employees who have left
Defined Benefit Scheme - Terms
Let’s look at some terms:
• Actuarial gains/losses 
These occur due to differences between previous estimates and what actually occurred 
These are recognised in the OCI
• Past service cost 

Dr Income statement 
Cr Pension Liability 
This is a change in the pension plan resulting in a higher pension obligation for employee
service in prior periods. 
They should be recognised immediately if already vested or not
• Plan curtailments or settlements 

Curtailments are reductions in benefits or the number of employees covered by the
pension 
Any gain/loss is recognised when the curtailment occurs.
130 aCOWtancy.com

lOMoARcPSD|6235581
• Current service cost 

Increase in pension liability due to benefits earned by employee service in the period 
Dr Income statement 
Cr Pension Liability
• Interest cost 
The unwinding on the discount of the pension liability 
Dr Interest 
Cr Pension Liability
• Expected return on plan assets 

This is the Interest, dividends and other revenue from the pension assets and is now to
be based on the return from AA-rated corporate bonds 
This means companies cannot set expected returns according to the assets actually held
by the plan; it could encourage them to invest in more secure vehicles than is currently
the case, seeing as the potential higher return will no longer be reflected in the accounts. 
The reason behind this is to improve transparency and consistency 
Dr Pension Asset 
Cr Interest received 
The Interest cost and EROA are netted off against each other.  
They use the same discount rate. 
So if a fund has more assets than liabilities (a surplus) - it will have net interest received 
If a fund has more liabilities than assets (a deficit) - it will have net interest paid
• Contributions to Pension fund 

This is simply the money that the company puts in to the fund - so the fund can buy
assets to generate an expected return 
Dr Pension Asset 
Cr Cash
131 aCOWtancy.com

lOMoARcPSD|6235581
• Benefits paid 
These are the actual pensions paid out to former employees. 
• Paying the pensions means we reduce the liability, but we use the pension fund to do it,
so we reduce the pension asset also 
• Dr Pension Liability 
Cr Pension Asset
132 aCOWtancy.com

lOMoARcPSD|6235581
- government grants
Government Grants - audit
There re 2 types - Revenue and Capital
The debit is always cash so we only have to know where we put the credit..
Revenue Grant
Cr I/S (other income or reduce expense)
Capital Grant
Cr Cost of asset
or
Cr Deferred Income
Revenue Grant
For I/S items such as wages etc
Dr Cash Cr Other income (or expense)
Capital Grant
For NCA such as machines and buildings
1. Option 1 
Dr Cash Cr Cost of asset 
This will have the effect of reducing depreciation on the income statement and the
asset on the SFP 
133 aCOWtancy.com

lOMoARcPSD|6235581
2. Option 2 
Dr Cash Cr Deferred Income 
This will have the effect of keeping full depreciation on the income statement and the
full asset and liability on the SFP 
Then... 
Dr Deferred Income Cr Income statement (over life of asset) 
This will have the effect of reducing the liability and the expense on the income
statement
An Example
• Option 1 
Asset $100 with 10yrs estimated useful life 
Received grant of $50 
Accounting for a grant received: 
DR Cash $50 
CR Asset $50  
At the Y/E 
Depreciation charge: 
DR Depreciation expense (I/S) (100-50)/10yrs = $5 
CR Accumulate depreciation $5
• Option 2 
Asset $100 with 10yrs estimated useful life 
Received grant of $50 
Accounting for a grant received: 
DR Cash $50 
CR Deferred income $50  
At the Y/E 
Depreciation charge: 
DR Depreciation expense (I/S) 100/10yrs = $10 
CR Accumulate depreciation $10 
Release of deferred income: 
DR Deferred income 50/10yrs =$5 
CR I/S $5 
134 aCOWtancy.com

lOMoARcPSD|6235581
Government grants can only be recognised when it is probable that all terms will be
reached
What isn't a government grant?

1. Government advice
2. Preferred government supplier
3. Tax breaks from the government
135 aCOWtancy.com

lOMoARcPSD|6235581
- related parties
IAS 24 Related Parties
A party is said to be related to an entity if any of the following three situations

occur:
The 3 situations are:

1. Controls / is controlled by entity
2. is under common control with entity
3. has significant influence over the entity
Types of related party

These therefore include:
1. Subsidiaries
2. Associate
3. Joint venture
4. Key management
5. Close family member of above (like my beautiful daughter pictured in her new school
uniform aaahhh)
6. A post-employment benefit plan for the benefit of employees
Not necessarily related parties

• Two entities with a director in common
• Two joint venturers
• Providers of finance
• A big customer, supplier etc
136 aCOWtancy.com

lOMoARcPSD|6235581
Stakeholders need to know that all transactions are at arm´s length and if not then be fully
aware.
Similarly they need to be aware of the volume of business with a related party, which
though may be at arm´s length, should the related party connection break then the volume
of business disappear also.
Disclosures
• General
The name of the entity’s parent and, if different, the ultimate controlling party
The nature of the related party relationship
Information about the transactions and outstanding balances necessary for an
understanding of the relationship on the financial statements
• As a minimum, this includes: 

Amount of outstanding balances
Bad and doubtful debt information
• Key management personnel compensation should be broken down by:

• short-term employee benefits
• post-employment benefits
• other long-term benefits
• termination benefits
• share-based payment
Group and Individual accounts
1. Individual accounts 
Disclose related party transactions / outstanding balances of parent, venturer or
investor. 
2. Group accounts 
The intra-group transactions and balances would have been eliminated.
137 aCOWtancy.com

lOMoARcPSD|6235581
- earnings per share
IAS 33 EPS Introduction
EPS is a much used PERFORMANCE appraisal measure
It is calculated as:
PAT - Preference dividends / Number of shares
It is not only an important measure in its own right but also as a component in the price
earnings (P/E) ratio (see below)
Diluted EPS
This is saying that the basic EPS might get worse due to things that are ALREADY in issue
such as:
Convertible Loan
• This will mean more shares when converted
138 aCOWtancy.com

lOMoARcPSD|6235581
• Share options 
This will mean more shares when exercised
Who has to report an EPS?

• PLCs
• Group accounts where the parent has shares similarly traded/being issued
EPS to be presented in the income statement.
139 aCOWtancy.com

lOMoARcPSD|6235581
.- provisions, contingent liabilities and  

contingent assets
Provisions
A provision is a liability of uncertain timing or amount
This means is that it is not a creditor, as you know exactly how much that is and when it is
to be paid
However it is still a potential liability

To create a provision though
Dr Expense 
Cr Provision
the potential liability must be probable
In fact 3 tests need to be passed..

1. Is there a present obligation (legal or constructive) as a result of a past event
2. Is it probable that an outflow of resources embodying economic benefits will be
required to settle the obligation
3. Can a reliable estimate can be made of the amount of the obligation
• Measurement of a Provision
The amount recognised as a provision should be the best estimate of the expenditure
required to settle the present obligation at the end of the reporting period. 
• Provisions for one-off events

E.g. restructuring, environmental clean-up, settlement of a lawsuit
Measured at the most likely amount
140 aCOWtancy.com

lOMoARcPSD|6235581
• Large populations of events

E.g. warranties, customer refunds
Measured at a probability-weighted expected value
A company sells goods with a warranty for the cost of repairs required in the first 2 months
after purchase.
Past experience suggests:

88% of the goods sold will have no defects
7% will have minor defects
5% will have major defects
If minor defects were detected in all products sold, the cost of repairs will be $24,000;
If major defects were detected in all products sold, the cost would be $200,000.
What amount of provision should be made?

(88% x 0) + (7% x 24,000) + (5% x 200,000) = $11,680
Contingent Assets
Here, it is not a potential liability, but a potential asset.

The principle of PRUDENCE is important here, it must be harder to show a potential asset
in your accounts than it is a potential liability.
This is achieved by changing the probability test.
For a potential (contingent) asset - it needs to be virtually certain (rather than just
probable).
Probability test for Contingent Liabilities

• Remote chance of paying out - Do nothing
• Possible chance of paying out - Disclosure
• Probable chance of paying out - Create a provision
Probability test for Contingent Assets
141 aCOWtancy.com

lOMoARcPSD|6235581
• Remote chance of receiving - Do nothing

• Possible chance of receiving - Do nothing
• Probable chance of receiving - Disclosure
• Virtually certain of receiving - create an asset in the accounts
142 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Provisions
Audit procedures & Evidence needed as follows
Procedures would include:

• Obtain written evidence from legal advisors that in their opinion amounts are probable to
be paid, and the basis of that opinion
• Review the claim itself to confirm the amount
• Inspect the board minutes for evidence of discussion of the claim, to obtain an
understanding as to the reason for the claim and whether it has been disputed
Auditing Insurance claims (Contingent Assets)

• Obtain a copy of the insurance claim made and confirm the amount claimed
• Enquire as to the basis of the amount claimed
• Review any supporting documentation such as management accounts showing lost
income for the period of halted production
• Scrutinise the terms of the insurance policy, to determine whether covered
• Seek permission to contact the insurance provider to enquire as to the status of the
claim, and attempt to receive written confirmation of the likelihood of any payment being
made
• Review correspondence between the client and the insurance provider, looking for
confirmation of any amounts to be paid
• Contact client lawyers to enquire if there have been any legal repercussions arising from
the insurance claim, e.g., the insurance company disputing the claim
143 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Warranty Provisions
Auditors should obtain sufficient audit evidence as to whether an accounting

estimate is reasonable and that disclosure is appropriate.
Audit procedures
1. Review and test the process used by management to develop the estimate
2. Review contracts or orders for the terms of the warranty to gain an understanding of
the obligation
3. Review correspondence with customers during the year to gain an understanding of
claims already in progress at the year end
4. Perform analytical procedures to compare the level of warranty provision year on year,
and compare actual to budgeted provisions.
5. Re-calculate the warranty provision
6. Agree the percentage applied in the calculation to the stated accounting policy of the
Client
7. Review board minutes for discussion of on-going warranty claims, and for approval of
the amount provided
144 aCOWtancy.com

lOMoARcPSD|6235581
- intangible assets
What is an intangible asset
Well, according to IAS 38, it’s an identifiable non-monetary asset without physical
substance, such as a licence, patent or trademark.
The three critical attributes of an intangible asset are:

1. Identifiability
2. Control (power to obtain benefits from the asset)
3. Future economic benefits
Whooah there partner, what´s identifiable mean??

Well it just means the asset is one of 2 things:
1. It is SEPARABLE, meaning it can be sold or rented to another party on its own (rather
than as part of a business) or
2. It arises from contractual or other legal rights.
It is the lack of identifiability which prevents internally generated goodwill being

recognised. It is not separable and does not arise from contractual or other legal rights.
Examples
• Employees can never be recognised as an asset; they are not under the control of the
employer, are not separable and do not arise from legal rights
• A taxi licence can be an intangible asset as they are controlled, can be sold/exchanged/
transferred and arise from a legal right 
(The intangible doesn’t have to be separable AND arise from a legal right, just one or the
other is enough). 
145 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Intangible Assets
Audit procedures & Evidence needed as follows
Basic procedures are:

1. Inspect legal documents, confirming the length / type / cost of asset
2. Agree cash paid to the bank statement and the cash book
3. Inspect minutes of a discussion with management regarding amortisation / non-
amortisation and recalculate where necessary
4. Look at forecast sales records to determine the future economic benefit to be derived
Development cost
Research and Development Definitions
Research
Research is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.
• An example of research could be a company in the pharmaceuticals industry undertaking

activities or tests aimed at obtaining new knowledge to develop a new vaccine.  
• The company is researching the unknown, and therefore, at this early stage, no future
economic benefit can be expected to flow to the entity.
Development
Development is the application of research findings or other knowledge to a plan or design

for the production of new or substantially improved materials, devices, products,
processes, systems, or services, before the start of commercial production or use.
146 aCOWtancy.com

lOMoARcPSD|6235581
• An example of development is a car manufacturer undertaking the design, construction,

and testing of a pre-production model.
Accounting Treatment of Research and Development

1. Research costs 
IAS 38 states that all expenditure incurred at the research stage should be written off
to the income statement as an expense when incurred, and will never be capitalised as
an intangible asset.
2. Development costs 
Should be capitalised as an intangible assets if meet the following criteria. 
Dr Intangible non-current assets (SOFP) 
Cr Bank/Payables
Under IAS 38, an intangible asset must demonstrate all of the following criteria:
• P robable future economic benefits
• I ntention to complete and use or sell the asset
• R esources (technical, financial and other resources) are adequate and available to
complete and use the asset
• A bility to use or sell the asset
• T echnical feasibility of completing the intangible asset (so that it will be available for use
or sale)
• E xpenditure can be measured reliably
Audit procedures:
1. Are the development costs material?
2. Evaluate whether the development costs meet the recognition criteria (PIRATE)
147 aCOWtancy.com

lOMoARcPSD|6235581
Some typical examples
Circumstance Provide?
Warranties/guarantees Accrue a provision (past event was the sale of

defective goods)
Customer refunds Accrue if the established policy is to give refunds
Onerous (loss-making) contract Accrue a provision
Land contamination Accrue a provision if the company's policy is to

clean up even if there is no legal requirement to do
so
Future operating losses No provision (no present obligation)
Firm offers staff training No provision (there is no obligation to provide the

training)
Major overhaul or repairs No provision (no obligation)
Restructuring by sale of an operation/line of Accrue a provision only after a binding sale

business agreement
Restructuring by closure of business locations or Accrue a provision only after a detailed formal plan
reorganisation is adopted and announced publicly. A Board
decision is not enough
148 aCOWtancy.com

lOMoARcPSD|6235581
. - financial instruments
Financial assets - Accounting Treatment
So we have these 3 categories..
Category Initial Measurement Year-end Measurement Difference goes

where?
FVTPL FV FV Profit and Loss
FVTOCI FV FV OCI
Amortised Cost FV Amortised Cost -
Initially both are measured at FV.

Now let's look at what happens at the year-end..
FVTPL accounting treatment

1. Revalue to FV
2. Difference to I/S
FVTOCI accounting treatment

1. Revalue to FV
2. Difference to OCI
Amortised cost accounting treatment

1. Re-calculate using the amortised cost table 
(see below)
149 aCOWtancy.com

lOMoARcPSD|6235581
Amortised Cost Table

8% 100 receivable loan (effective rate 10% due to a premium on redemption)
Opening Balance Interest (effective rate) (CashReceived) Closing balance
100 10 (8) 102
Audit procedures on short-term investments

1. Agree the FV of the shares held as investments to stock market share price
2. Confirm the original cost of the investment to cash book and bank statements
3. Discuss the accounting treatment with management and confirm that an adjustment will
be made to recognise the shares at fair value
4. Review the notes to the financial statements to ensure that disclosure is sufficient to
comply with the requirements of IFRS 9
5. Enquire with the treasury management as to whether there have been any disposals of
the original shares held
6. Review board minutes to confirm the authorisation and approval of the amount
invested
7. For any investments from which dividends have been received, confirm the number of
shares held to supporting documentation such as dividend received certificates
150 aCOWtancy.com

lOMoARcPSD|6235581
Impairment of Financial Instruments
Impairment of Financial Instruments
Expected Credit Loss model

This applies to:
1. Amortised cost items

2. FVTOCI items
How it works
• Significant increase in credit risk occurred? Show lifetime expected losses
• No significant increase in credit risk? Show 12-month expected losses only
How do you calculate the Expected Credit Loss?
Use:
1. a probability-weighted outcome
2. the time value of money
3. the best available forward-looking information.
Notice the use of forward-looking info - this means judgement is needed - so it will be
difficult to compare companies
151 aCOWtancy.com

lOMoARcPSD|6235581
Stage 1 - Assets with no significant increase in credit risk
For these assets:

1. 12-month expected credit losses (‘ECL’) are recognised and
2. Interest revenue is calculated on the gross carrying amount of the asset (that is,
without deduction for credit allowance)
12-month ECL are based on the asset’s entire credit loss but weighted by the probability
that the loss will occur within 12 months of the Y/E
Stage 2 - Assets with a significant increase in credit risk (but no evidence of

impairment)
For these assets:

1. Lifetime ECL are recognised
2. Interest revenue is still calculated on the gross carrying amount of the asset.
152 aCOWtancy.com

lOMoARcPSD|6235581
Lifetime ECL come from all possible default events over its expected life
Expected credit losses are the weighted average credit losses with the probability of
default (‘PD’) as the weight.
Stage 3 - Assets with evidence of impairment
For these assets:

1. Lifetime ECL are recognised and
2. Interest revenue is calculated on the net carrying amount (that is, net of credit
allowance
In subsequent reporting periods, if the credit quality improves so there’s no longer a

significant increase in credit risk since initial recognition, then the entity reverts to
recognising a 12-month ECL allowance
153 aCOWtancy.com

lOMoARcPSD|6235581
Where does the impairment go?

The changes in the loss allowance balance are recognised in profit or loss as an
impairment gain or loss
So what do all these new rules on impairment mean?
Impairments are now recorded BEFORE any actual impairment (except for FVTPL items)
due to the 12-month ECL allowance for all assets
The ECL model is more forward looking when calculating ECLs
Entities with shorter term and higher quality financial instruments are likely to be less
significantly affected.
Higher volatility in the ECL amounts charged to profit or loss, increasing as economic
conditions are forecast to deteriorate, meaning more judgement required
For companies, the ECL model will most likely not cause a major increase in allowances
for short-term trade receivables because of their short term nature.
The provision matrix should help measure the loss allowance for short-term trade
receivables.
Collective Basis
If the asset is small it’s just not practical to see if there’s been a significant increase in
credit risk 
So, you can assess ECLs on a collective basis, to approximate the result of using
comprehensive credit risk information that incorporates forward-looking information at an
individual instrument level
154 aCOWtancy.com

lOMoARcPSD|6235581
Simplified Approach
This means no tracking changes in credit risk! 
Instead just recognise a loss allowance based on lifetime ECLs at each reporting date,
right from origination. 
The simplified approach is for trade receivables, contract assets with no significant
financing component, or for contracts with a maturity of one year or less
12-month expected credit losses

These are a portion of the lifetime ECLs that are possible within 12 months
The portion is weighted by the probability of a default occurring
It is not the predicted (probable) defaults in the next 12 months. For instance, the
probability of default might be only 25%, in which case, this should be used to calculate
12-month ECLs, even though it is not probable that the asset will default.
Also, the 12-month expected losses are not the cash shortfalls that are predicted over only
the next 12 months. For a defaulting asset, the lifetime ECLs will normally be significantly
greater than just the cash flows that were contractually due in the next 12 months.
Lifetime expected credit losses

These are from all possible default events over the expected life
Estimate them based on the present value of all cash shortfalls
So, basically, it’s the difference between:

• The contractual cash flows And
• The cash flows now expected to receive
As PV is used, even late (but the same) cashflows create an ECL
For a financial guarantee contract, the ECLs would be the PV of what it expects to pay as
guarantor less any amounts from the holder 
155 aCOWtancy.com

lOMoARcPSD|6235581
Financial liabilities - Categories
There's only 2 categories, FVTPL and Amortised cost.. Yay!
Right-y-o, we’ve looked at recognising (bring into the accounts for those of you who are a
sandwich short of a picnic*) - now we want to look at HOW MUCH to bring the liabilities in
at.
*A quaint old English saying - meaning you're an idiot :p
We already dealt with this on a tricky convertible loan.

Trust me this section is much easier.
Basically there are 2 categories of Financial Liability...
1. Fair Value Through Profit and Loss (FVTPL) 

This includes financial liabilities incurred for trading purposes and also derivatives.
2. Amortised Cost 
If financial liabilities are not measured at FVTPL, they are measured at amortised cost.
The good news is that whatever the category the financial liability falls into - we always
recognise it at Fair Value INITIALLY.
It is how we treat them afterwards where the category matters (and remember here we are
just dealing with the initial measurement).
Accounting Treatment of Financial Liabilities (Overview)
Initially At Year-End Any gain/loss
FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost
156 aCOWtancy.com

lOMoARcPSD|6235581
So - the question is - how do you measure the FV of a loan??

Well again the answer is simple - and you’ve done it already with compound instruments.
All you do is those 2 steps:
STEP 1: Take all your actual future cash payments
STEP 2: Discount them down at the market rate
If the market rate is the same as the rate you actually pay (effective rate) then this is no
problem and you don’t really have to follow those 2 steps as you will just come back to the
capital amount…let me explain
10% 1,000 Payable Loan 3 years

Capital 1,000 x 0.751 = 751
Interest 100 x 2.486 = 249
Total 1,000
So the conclusion is - WHERE THE EFFECTIVE RATE YOU PAY (10%) IS THE SAME AS
THE MARKET RATE (10%) THEN THE FV IS THE PRINCIPAL - so no need to do the 2
steps.
Always presume the market rate is the same as the effective rate you’re paying unless told
otherwise by El Examinero.
Possible Naughty Bits

Premium on redemption
This is just another way of paying interest. Except you pay it at the end (on redemption)
e.g. 4% 1,000 payable loan - with a 10% premium on redemption.
This means that the EFFECTIVE interest rate (the rate we actually pay) is more than 4% -
because we haven’t yet taken into account the extra 100 (10% x 1,000) payable at the
end. So the examiner will tell you what the effective rate actually is - let’s say 8%.
The crucial point here is that you presume the effective rate (e.g. 8%) is the same as the
market rate (8%) so the initial FV is still 1,000. 
157 aCOWtancy.com

lOMoARcPSD|6235581
Discount on Issue
Exactly the same as above - it is just another way of paying interest - except this time you
pay it at the start
e.g. 4% 1,000 payable loan with a 5% discount on issue.
So again the interest rate is not 4%, because it ignores the extra interest you pay at the
beginning of 50 (5% x 1,000). So the effective rate (the rate you actually pay) is let’s say
7% (will be given in the exam).
The crucial point here is that the discount is paid immediately. So, although you presume
that the effective rate (7%) is the same as the market rate (7% say), the INITIAL FV of the
loan was 1,000 but is immediately reduced by the 50 discount - so is actually 950
NB You still pay interest of 4% x 1,000 not 4% x 950
158 aCOWtancy.com

lOMoARcPSD|6235581

- investment properties
Investment property
So here we are dealing with a situation where a company owns a building (or
land) but doesn’t use it . Instead it is just an investment for them
It stands alone and makes the company some cash:

1. From Rental Income  
- no surprise here - throw it in the income statement. No problemo
2. From Capital appreciation  

- As the asset is not used, but rather held for investment purposes, then historic cost
becomes particularly useless (you could argue). 
Much better is a market based fair value. So each property is revalued and the
difference is added to the asset and the other side goes to the income statement
What if the property is ours but only under an Operating Lease?

This is fine but the property must be measured using the FV model (see later)
IAS 40 lists the following as examples of investment property:
• Land held for long-term capital appreciation rather than short-term sale
• Land held for a currently undetermined future use
• A building owned by the entity (or held under a finance lease) and leased to a third party
under an operating lease
• A building which is vacant but is held to be leased out under an operating lease
• Property being constructed or developed for future use as an investment property
159 aCOWtancy.com

lOMoARcPSD|6235581
The following are NOT investment property

• Property intended for sale in the ordinary course of business (IAS 2)
• Property being constructed or developed on behalf of third parties (IAS 11)
• Owner-occupied property (IAS 16)
• Property leased to another entity under a finance lease (IAS 17)
An investment property should be recognised when:

• It is probable that the future economic benefits will flow; and
• The cost of the investment property can be measured reliably.
Initially measured at cost.

This includes:
• Purchase price
• Directly attributable costs, for example transaction costs (professional fees, property
transfer taxes)
This does not include Start up costs
160 aCOWtancy.com

lOMoARcPSD|6235581

.- share-based payment transactions
Share Based Payments - Introduction
There are 3 types of Share based payment..
These are..
1. Equity-settled share-based payment 

This is where the company pays shares in return for goods and/or services received. 
Dr Expense 
Cr Equity
2. Cash-settled share-based payment 

This is where cash is paid in return for goods and services received, HOWEVER..the
actual cash amount though is based on the share price. 
These are also called SARs (Share Appreciation Rights)
Dr Expense 
Cr Liability
3. Transactions with a choice of settlement 

A choice of cash or shares paid in return for goods and services received. 
depends on choice made
Vesting period
Often share based payments are not immediate but payable in say 3 years. The expense
is spread over these 3 years and this is called the vesting period. 
161 aCOWtancy.com

lOMoARcPSD|6235581
How much to recognise?
So we have decided that share based payments (either shares or cash based on share
price) should go into the accounts .
(Dr expense Cr Equity or Liability)
We now have to look at the value to put on these:
Option 1: Direct method 

Use the FV of the goods or services received
Option 2: Indirect method  

Use the FV of the shares issued by the company 
Equity settled - Use FV of shares @ grant date 
Cash settled - Update FV of shares each year 
IFRS 2 suggests you choose option 1 - the FV of the goods/services.  
However, if the FV of these cannot be reliably measured then you should go for option 2 -
FV of shares issued. 
Strangely enough, option 2 is the most common. This is because share based payments
are often associated with paying employees.  
You cannot put a value on the work done by employees - except for the value of what you
pay them i.e. Option 2.
Equity Settled
An entity grants 100 share options on its $1 shares to each of its 500 employees on 1
January Year 1. Each grant is conditional upon the employee working for the entity over
the next three years. The fair value of each share option as at 1 January Year 1 is $10.
On the basis of a weighted average probability, the entity estimates on 1 January that 100
employees will leave during the three-year period and therefore forfeit their rights to share
options.
162 aCOWtancy.com

lOMoARcPSD|6235581
The following actually occurs:

– 20 employees leave during Year 1 and the estimate of total employee departures over
the three-year period is revised to 70 employees
– 25 employees leave during Year 2 and the estimate of total employee departures over
the three-year period is revised to 60 employees
– 10 employees leave during Year 3
Solution
Step 1: Decide if this is a cash or equity settled SBP - share options are equity settled (so
Dr Expense Cr Equity).
Step 2: Decide whether to value directly or indirectly - these are for employees so
indirectly.
Step 3: Calculate how many employees (and their share options each) are expected to be
issued at the end of the vesting period.
Year 1 430 Employees expected to be left at end (500-70) x 100 (share options each) x
$10 (FV @ GRANT date) x 1/3 (time through vesting period) = 143,300
Year 2 440 x 100 x $10 x 2/3 - 143,300 = 150,000
Year 3 445 x 100 x $10 x 3/3 - 293,300 = 151,700
So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Equity 143,300
Notice that if you add these up it comes to 445,000. This is exactly our final liability (445 x
100 x $10 x 3/3) - it’s just we’ve spread it over the 3 years vesting period.
163 aCOWtancy.com

lOMoARcPSD|6235581
Cash settled illustration

Same question with additional information of share price at the end of each year:
Year 1 10
Year 2 12
Year 3 14
Solution
As this is cash settled then the double entry becomes Dr Expense Cr Liability and we do
not keep the value of the option @ grant date but change it as we pass through the vesting
period.
1 430 x 100 x 10 x 1/3 = 143,300

2 440 x 100 x 12 x 2/3 - 143,300 = 208,700
3 445 x 100 x 14 x 3/3 - 623,000 x 3/3 - 352,000 = 271,000
So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Liability 143,300

Notice that if you add these up it comes to 623,000. This is exactly our final liability (445 x
100 x $14 x 3/3) - it’s just we’ve spread it over the 3 years vesting period.
164 aCOWtancy.com

lOMoARcPSD|6235581
Auditing SBP
Principal audit procedures – measurement of share-based payment expense
Those are:
1. Obtain management calculation of the expense and agree the following from the
calculation to the contractual terms of the scheme: 
– Number of employees and executives granted options 
– Number of options granted per employee 
– The official grant date of the share options 
– Vesting period for the scheme 
– Required performance conditions attached to the options.
2. Recalculate the expense and check that the fair value has been correctly spread over
the stated vesting period.
3. Agree fair value of share options to specialist’s report and calculation, and evaluate
whether the specialist report is a reliable source of evidence.
4. Agree that the fair value calculated is at the grant date.
5. Obtain and review a forecast of staffing levels or employee turnover rates for the
duration of the vesting period, and scrutinise the assumptions used to predict level of
staff turnover.
6. Obtain written representation from management confirming that the assumptions used
in measuring the expense are reasonable.
If no market value available for FV

Then we need to audit the model used as follows:
• Review assumptions used, and inputs into the the model (eg. option pricing model) used
by management to estimate the fair value of the share options at the grant date
• Consider the appropriateness of the model
• Consider using an expert to provide evidence as to the validity of the fair value used
• Check the sensitivity of the calculations to a change in the assumptions used in the
valuation 
165 aCOWtancy.com

lOMoARcPSD|6235581

- business combinations
Group accounting audit
Always think of the basics
Acquisition in year
• I/S pro rate inclusion of sub
• Calculate GW
• Pro rata NCI in the year
• Think about component auditors
• Materiality will now increase
• Ensure sub uses same accounting policies and same year end as parent
• Analytical procedures may be enough for the audit of this acquisition (if its in the same
industry as us)
• New related party transactions (with the sub)
Further acquisition?
e.g. from 60% to 80%
• Any "profit" goes to equity NOT I/S
Partial Disposal
eg. 80% to 60%
• Any profit goes to equity NOT I/S
Full Disposal
eg 60% to 30%
166 aCOWtancy.com

lOMoARcPSD|6235581
• Any profit goes to I/S

• The sub is taken out completely from group accounts (NA, GW, NCI)
• Is replaced by an associate at FV
167 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Goodwill
Learn the 3 components of goodwill
FV of Consideration
• If it's cash easy - use the figure given
• If it's future payment - discount this figure down
• If it's a contingent item (dependent on something happening) - use the FV of that item
NCI
One of two choices
• Proportionate value of FV of S's NA

• FV of S as a whole
• This means goodwill share is only given to NCI in the FV method
FV of NA acquired
• Include intangibles and contingent liabilities that are not on S's accounts normally
• If the values are provisional - there is 1 year from date of acquisition to change this figure
Audit evidence
1. Agreement of the monetary value and payment dates of the consideration per the client
schedule to legal documentation signed by vendor and acquirer.
2. Inspect the bank statement and cash book whether the payment was paid.
3. If payment occurs after year end confirm that a current liability is recognised on the
individual company and consolidated statement of financial position (balance sheet).
4. Board minutes approving the payment.
5. Recalculation of discounting calculations applied to deferred and contingent
consideration.
6. Agreement that the discount rate used is pre-tax, and reflects current market
assessment of the time value of money
7. Agree % of ownership, e.g. using Companies House search/register of significant
shareholdings
8. Obtain due diligence report and agree net assets valuation if appropriate 
168 aCOWtancy.com

lOMoARcPSD|6235581
Step Acquisitions
Step Acquisitions
When Control is achieved is the key date..
Consolidation only occurs when control is eventually achieved.
When Control is achieved this occurs:

• Remeasure all previous holdings to FV
• Any gain or loss to income statement
Illustration
P acquired 10% of S in year 1 for 100.

P acquired a further 60% of S in year 2 for 800. At this date, the original 10% now has a
FV of 140.
How would this be accounted for?

The key date of when controlled is achieved is year 2. At this date we must:
• Revalue the original 10% from 100 to 140

• The 40 gain goes to the income statement (and retained earnings)
• Also we would now start consolidating S (as we now control it). The Consideration figure
in the goodwill working would now be 940 (140 + 800).
Further acquisition after control is achieved
If there are further acquisitions after control - this is deemed to be a purchase from the
other owners (NCI) - so no profit is calculated. Simply.
169 aCOWtancy.com

lOMoARcPSD|6235581
Here you will need to do the following calculation:
FV of consideration (for the extra % bought) x
Decrease in NCI (x)
Difference - goes to Equity of the Parent x/(x)
Illustration
H acquired 60% S for 100 in year 4 when the FV of its NA was 90. Proportionate NCI
method is used.
2 years later its NA are 150 and H acquires another 20% for 80.
Calculate decrease in NCI and movement in parents equity for the latest acquisition.
FV of consideration 80
Decrease in NCI (30)
Difference - goes to Equity of the Parent 50
NCI
@ Acquisition 36 (40% x 90)
Post acquisition 24 (40% x (150-90))
Impairment 0
TOTAL AT DATE OF DISPOSAL 60
SO NCI was 60 (representing 40%). Now, by acquiring a further 20% from the NCI, this
means NCI will go from 40% to 20%. It has halved.
So NCI has gone down by 30.
170 aCOWtancy.com

lOMoARcPSD|6235581

- assets held for sale and discontinued operations
Assets Held for Sale
How do we deal with items in our accounts which we are no longer going to
use, instead we are going to sell them
So, think about this for a moment.. Why does this matter to users?
Well, the accounts show the business performance and position, and you expect to see
assets in there that they actually are looking to continue using.
Therefore their values do not have to be shown at their market value necessarily (as your
intention is not to sell them)
Here, though, everything changes… we are going to sell them.
So maybe market value is a better value to use, but they haven’t been sold yet, so
showing them at MV might still not be appropriate as this value has not yet been achieved
So these are the issues that IFRS 5 tried, in part, to deal with and came up with the
following solution..
Accounting Treatment
1. Step 1 - Calculate the Carrying Amount... 

Bring everything up to date when we decide to sell 
This means: 
- charge the depreciation as we would normally up to that date or 
- revalue it at that date (if following the revaluation policy)
171 aCOWtancy.com

lOMoARcPSD|6235581
2. Step 2 - Calculate FV - CTS 

Now we can get on with putting the new value on the asset to be sold.. 
Measure it at Fair Value less costs to sell (FV-cts).  
This is because, if you think about it, this is the what the company will receive. 
HOWEVER, the company hasn’t actually made this sale yet and so to revalue it now to
this amount would be showing a profit that has not yet happened
3. Step 3 - Value the Assets held for sale  

IFRS 5 says the new value should actually be… 
...The lower of carrying amount (step 1) and FV-CTS (step 2)
4. Step 4 - Check for an Impairment  

Revaluing to this amount might mean an impairment (revaluation downwards) is
needed.  
This must be recognised in profit or loss, even for assets previously carried at revalued
amounts.
Also, any assets under the revaluation policy will have been revalued to FV under step 1
Then in step 2, it will be revalued downwards to FV-cts.
Therefore, revalued assets will need to deduct costs to sell from their fair value and this
will result in an immediate charge to profit or loss.
Subsequent increase in Fair Value?
• This basically happens at the year-end if the asset still has not been sold 
A gain is recognised in the p&l up to the amount of all previous impairment losses.
Non-depreciation
Non-current assets or disposal groups that are classified as held for sale shall not be
depreciated.
When is an asset recognised as held for sale?

• Management is committed to a plan to sell
• The asset is available for immediate sale
172 aCOWtancy.com

lOMoARcPSD|6235581
• An active programme to locate a buyer is initiated

• The sale is highly probable, within 12 months of classification as held for sale
• The asset is being actively marketed for sale at a sales price reasonable in relation to its
fair value
Abandoned Assets
The assets need to be disposed of through sale. Therefore, operations that are expected
to be wound down or abandoned would not meet the definition. Therefore assets to be
abandoned would still be depreciated.
Balance sheet presentation
Presented separately on the face of the balance sheet in current assets

• Subsidiaries Held for Disposal 
IFRS 5 applies to accounting for an investment in a subsidiary held only with a view to its
subsequent disposal in the near future.
• Subsidiaries already consolidated now held for sale 

The parent must continue to consolidate such a subsidiary until it is actually disposed of.
It is not excluded from consolidation and is reported as an asset held for sale under IFRS
5. So subsidiaries held for sale are accounted for initially and subsequently at FV-CTS of
all the net assets not just the amount to be disposed of.
173 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Held for Sale
Audit procedures & Evidence needed as follows:
1. Inspect board minute at which the disposal of the properties was agreed by
management
2. Ensure active programme to locate a buyer, for example, instructions given to real
estate agency
3. Inspect any minutes of meetings held with prospective purchasers of any of the
properties, or copies of correspondence with them
4. Written representation from management on the opinion that the assets will be sold
within a year
5. Subsequent events review, including a review of post year-end board minutes and a
review of significant cash transactions, to confirm if any properties are sold in the
period after the year end
6. Review client’s depreciation calculations, to confirm no depreciation once reclassified
as held for sale
174 aCOWtancy.com

lOMoARcPSD|6235581

- events after the end of the reporting  
period
IAS 10 Events After The Reporting Period
Events can be adjusting or non-adjusting.
If the event gives us more information about the condition at the year-end then we adjust.
If not then we don’t.
When is the "After the Reporting date" period?
It is anytime between period end and the date the accounts are authorised for issue.
Ok and why is it important?
Well it may well be that many of the figures in the accounts are estimates at the period
end.
However, what if we get more information about these estimates etc afterwards, but before
the accounts are authorised and published.. should we change the accounts or not?
The most important thing to remember is that the accounts are prepared to the SFP date.
Not afterwards.
So we are trying to show what the situation at the SFP date was. However, it may be that
more information ABOUT the conditions at the SFP date have come about afterwards and
so we should adjust the accounts.
Sometimes we do not adjust though… 
175 aCOWtancy.com

lOMoARcPSD|6235581
Adjusting Events
The event (which occurred after the SFP date) provides evidence of conditions that existed
at the period end
Examples are..
1. Debtor goes bad 5 days after SFP date  

(This is evidence that debtor was bad at SFP date also)
2. Stock is sold at a loss 2 weeks after SFP date
3. Property gets impaired 3 weeks after SFP date  
(This implies that the property was impaired at the SFP date also)
Non-Adjusting Events - these are disclosed only
These are events (after the SFP date) that occurred which do not give evidence of
conditions at the year end, rather they are indicative of conditions AFTER the SFP date
1. Stock is sold at a loss because they were damaged post year-end  

(This is evidence that they were fine at the year-end - so no adjustment)
2. Property impaired due to a fall in market values generally post year end  
(This is evidence that the property value was fine at the year end - so no adjustment
required).
Non-adjusting event which affects Going Concern

Adjust the accounts to a break up basis regardless if the event was a non-adjusting event.
176 aCOWtancy.com

lOMoARcPSD|6235581

- the effects of foreign exchange rates
Foreign exchange effects
Understand these from a single and group company viewpoint
Group Companies
e.g. Foreign subsidiary
1. Retranslate SFP at year end rate

2. Retranslate I/S at average or actual rate
3. Difference goes to reserves NOT I/S
Single company
e.g. Dealing with foreign transactions
1. Difference between buying and paying rate

2. Difference between selling and receiving rate
3. Retranslate all foreign monetary balances (cash, loans, debtors etc) at year end rate
4. Difference goes to I/S
177 aCOWtancy.com

lOMoARcPSD|6235581

- borrowing costs
Borrowing Costs
Borrowing Costs
Let’s say you need to get a loan to construct the asset of your dreams - well the interest on
the loan then is a directly attributable cost.
So instead of taking interest to the I/S as an expense you add it to the cost of the asset.
(in other words - you capitalise it)
There are 2 scenarios here to worry about:

1. You use current borrowings to pay for the asset
2. You get a specific loan for the asset
1) Use current borrowings
This is looking at the scenario where we use funds we have already borrowed from
different sources.
So, if the funds are borrowed generally – we need to calculate the weighted average cost
of all the loans we have generally.
(I know you're thinking - how the cowing'eck do I work out the weighted average of
borrowings... aaarrgghh!).
178 aCOWtancy.com

lOMoARcPSD|6235581
Well relax my little monkey armpit - here's how you do it:

1. Calculate the total amount of borrowings
2. Calculate the interest payable on these in total
3. Weighted average of borrowing costs = Divide the interest by the borrowing - et voila!
4. We then take this weighted average of borrowing costs and multiply it by any
expenditure on the asset.  
The amount capitalised should not exceed total borrowing costs incurred in the period.
Illustration
5% Overdraft 1,000
8% Loan 3,000
10% Loan 2,000
We buy an asset with a cost of 5,000 and it takes one year to build - how much interest
goes to the cost of the asset?
Solution
Calculate the WA cost of the borrowings:
1. Total Borrowing = (1,000+3,000+2,000) = 6,000

2. Interest payable = (50+240+200) = 490
3. 490/6,000 = 8.17%
4. So the total interest to be added to the asset is 8.17% x 5,000 = 408
2) Get a specific loan
Ok well you would think this is easy - just the interest paid, surely?! But it’s not quite that
easy…
It is the actual borrowing costs less investment income on any temporary investment
of the funds
179 aCOWtancy.com

lOMoARcPSD|6235581
So what does this mean exactly?
Well imagine you need 10,000 to build something over 3 years. You borrow 10,000 at the
start but don’t need it all straight away.
So the bit you don’t need you leave in the bank to gain interest
So, the amount you could capitalise would be the interest paid on the 10,000 less the
interest received on the amount not used and left in the bank (or reinvested elsewhere)
Steps:
1. Calculate the interest paid on the specific loan

2. Calculate any interest received on loans proceeds not used
3. Add the net of these 2 to 'cost of the asset'
Illustration
Buy asset for 2,000 - takes 2 years to build.

Get a 2,000 10% loan.
We reinvest any money not used in an 8% deposit account.
In year 1 we spend 1,200.
How much interest is added to the cost of the asset?
1. Interest Paid = 2,000 x 10% = 200

2. Interest received = ((2,000-1,200) x 8%) = 64
3. Dr PPE Cost (200-64) = 136 
Cr Interest Accrual
Basic Idea
Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset form part of the cost of that asset.
Other borrowing costs are recognised as an expense. 
180 aCOWtancy.com

lOMoARcPSD|6235581
So what is a “Qualifying asset?”
It is one which needs a substantial amount of time to get ready for use or sale.
This means it can’t be anything that is available for use when you buy it.
It has to take quite a while to build (PPE, Investment Properties, Inventories and
Intangibles).
You don’t have to add the interest to the cost of the following assets:
1. Assets measured at fair value,
2. Inventories that are manufactured or produced in large quantities on a repetitive basis
even if they take a substantial period of time to get ready for use or sale.
When should we start adding the interest to the cost of the asset?
Capitalisation starts when all three of the following conditions are met:
1. Expenditure begins for the asset

2. Borrowing costs begin on the loan
3. Activities begin on building the asset e.g. Plans drawn up, getting planning etc. So
just having an asset for development without anything happening is not enough to
qualify for capitalisation
Are borrowing costs just interest?

It’s actually any costs that an entity incurs in connection with the borrowing of funds.
So it includes:
• Interest expense calculated using the effective interest method.

• Finance charges in respect of finance leases
181 aCOWtancy.com

lOMoARcPSD|6235581
What about if the activities stop temporarily?
Well you should stop capitalising when activities stop for an extended period
During this time borrowing costs go to the profit or loss.
Be careful though - If the temporary delay is a necessary part of the construction process
then you can still capitalise, e.g. Bank holidays etc.
When will capitalisation stop?
Well, when virtually all the activities work is complete. This means up to the point when
just the finalising touches are left.
NB
• Stop capitalising when AVAILABLE for use. This tends to be when the construction is
finished
• If the asset is completed in parts then the interest capitalisation is stopped on the
completion of each part
• If the part can only be sold when all the other parts have been completed, then stop
capitalising when the last part is completed
182 aCOWtancy.com

lOMoARcPSD|6235581
Evidence for Assertions and Disclosures
Accounting Recap of Fair Values
Fair value is "the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date"
IFRS 13 gets the Fair values by using a 'fair value hierarchy', which categorises inputs into
three levels:
Level 1 inputs: quoted prices in active markets for identical assets /liabilities
Level 2 inputs: Observable inputs (other than market prices)
Level 3 inputs: Unobservable inputs
Auditing Fair Values
Some FVs are easier to audit (those in a market) than others
Eg. An investment property in a market with other similar properties is easy - use the
market price for the similar properties and adjust appropriately
Others though such as a big pension scheme is trickier.
Lots of assumptions need to be made about the future (wages, length of service, death
etc)
Here the auditor needs to consider:

• Management's past history of estimating FVs etc
• Reviewing budgets, minutes etc
• Management's reasons for the way they prepared the estimates
• Whether the method is consistent with other fair value measurements
183 aCOWtancy.com

lOMoARcPSD|6235581
The auditor should consider:

1. The length of time any assumptions cover (Longer is more subjective)
2. The number of assumptions made
3. The amount of subjectivity, uncertainty involved
4. Any lack of objective data
5. The timings of any valuations used
6. The reliability of third party evidence
7. The impact of subsequent events
8. Obtaining written representations from management that assumptions are reasonable
ISA 540 Exposure draft

Accounting estimates can be difficult to audit: you need to look at management's controls
AND how management has arrived at an estimate.So assess risks properly and apply
professional scepticism.
ED 540 suggests:
1) Understanding the entity
2) Identify and assess risks of material misstatement
3) Designing procedures to obtain evidence (Inherent risk depends on the complexity:
amount of Management Judgment and estimation uncertainty)
The auditor then ‘stands back' from the evidence obtained, and applies further
professional scepticism to evaluate the audit evidence obtained 
184 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D3b) Explain how the auditor’s responsibilities for corresponding figures,
comparative financial statements, and ‘other information’, are discharged.
Comparatives
Comparatives must be presented in accordance with the applicable financial
reporting framework
Audit work on comparatives is far less than current year figures.
Basically just ensure:

1. They agree with the previous period
2. Accounting policies are consistent applied in the two periods
What if a material misstatement is found in the comparative?

Perform appropriate additional procedures
Comparatives and the Audit Report
The audit opinion should not normally refer to the corresponding figures
Unless the following apply:

• Qualified opinion last time remains unresolved - Modify this year's report
• Misstatement in comparative found but not restated - Adverse opinion on comparative
• Prior period financial statements were audited by another auditor - use "other matter"
paragraph to explain this
• Prior period financial statements were not audited - use "other matter" paragraph to
explain this
Comparative Issue Resolved "Other matter" paragraph if material to this year
Comparative Issue NOT Resolved Modify Report
185 aCOWtancy.com

lOMoARcPSD|6235581
Other Information
The other information in the accounts such as the Directors report, the Chairman’s report
and the employees report are not covered by the audit.
However, the auditor must review such information and highlight any material
inconsistency with the audited financial statements or material misstatements of fact.
• Material inconsistency 
If FS are wrong - and management refuse to amend - qualify the audit report due to
disagreement 
If OTHER INFO is wrong - and management refuse to amend - an EOM paragraph only
is needed
• Misstatement of fact 
If management refuse to amend then an EOM paragraph is needed
FS problem not resolved "Except for" paragraph or "Adverse" opinion
Other information NOT corrected "Other matter" paragraph or seek legal advice
186 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D3c) Explain the auditor’s main considerations in respect of social and
environmental matters and how they impact on entities and their financial statements
(e.g. impairment of assets, provisions and contingent liabilities).
Social and environmental issues
..affect the statutory audit at:
• The planning stage (Inherent risk) 

Any environmental regulations? Any key social issues?  
Review the results of any environmental audits undertaken by the company.
• While doing substantive procedures (impairment/provisions) 
Provisions (for example, for site restoration, fines/compensation payments) 
Contingent liabilities (for example, in relation to pending legal action) 
Asset values (issues may impact on impairment or purchased goodwill/products) 
Capital/revenue expenditure (costs of clean-up or meeting legal standards) 
Development costs (new products)
• Review stage (going concern) 
187 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D4. Using the work of others
Syllabus D4a) Recognise when it is justifiable to place reliance on the work of an expert
(e.g. a surveyor employed by the audit client).
Why Rely on Experts?
ISA 620 deals with the use of the work of an expert by the auditor
The auditor may not have the expertise to make judgements on all aspects of a clients’
business and may seek help in the form of an expert.
Examples of this are specialist inventory, property valuation and complex work in progress.
Why rely on experts?

1. Auditors do not have to be experts in everything
2. Often it's effective and efficient to do so
3. They need to where they lack the skills
How much to rely on experts?

Auditor needs to make judgements on:
• Their Independence, Objectivity and Competence 

Enquiries: 
Competence 
Is a member of a recognised professional body? 
How long has the expert been a member of the recognised body? 
How much experience does the expert have? 
Objectivity 
Does the expert have any financial interest in the company? 
Does the expert have any personal relationship with any director in the company? 
Is the fee paid for the service reasonable and a fair, market based price?
188 aCOWtancy.com

lOMoARcPSD|6235581
• This is based on their qualifications and their experience
• If an expert in the inventory of the entity being audited is consulted on valuation of

inventory, but works for a subsidiary of the entity then the auditor may consider them to
be not sufficiently independent
Before any work is performed by the expert the auditor should agree in writing:
1. Nature, scope and objectives
2. Roles and responsibilities
3. Nature of communication
4. Confidentiality of expert
After the work - Auditor ensures it is appropriate

This means considering:
Consistency with other evidence
Any significant assumptions made
The accuracy of source data
No reference in the Audit Report

The auditor should make no reference to the use of the work of others in the audit report
It is the auditors’ opinion in the report and the work of others is simply one type of
evidence that may be used, if sufficient and reliable, to come to that opinion
189 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D4c) Assess the appropriateness and sufficiency of the work of internal
auditors and the extent to which reliance can be placed on it.
Why Rely on Internal Audit?
The external auditor must determine whether it is likely to be adequate for the
purposes of the audit:
So we look at:
Whether the internal audit staff are sufficiently independent to retain objectivity
The qualifications and technical competence of the internal audit staff
The professionalism of the staff and the standing of internal audit within the
organisation
Are internal audit constrained in any way by management?
If these considerations are fulfilled the auditor may assess the reliability of the work
carried out by internal audit by ensuring:
• Internal audit working papers are well documented and have been reviewed
• Evidence gained by internal audit is sufficient and appropriate
• Any conclusions drawn are reasonable and valid
• Management have acted on recommendations made by internal audit
If all of the above is satisfied the auditor may choose to place reliance on some of the work
of internal audit.
Remember that although they may use some of the work of internal audit as evidence, the
responsibility for the final opinion will always lie with the external auditor.
190 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D4b) Evaluate the potential impact of an internal audit department on the
planning and performance of the external audit.
Internal v External Audit
Let's look at the difference in roles between internal and external audit
Objective & Planning

• Internal Audit
Dictated by management - planning follows this
However, good corporate governance would allow IA a degree of independence over
objectives
• External Audit
Ensure accounts free from material misstatement and prepared in line with reporting
framework.
Planned in accordance with ISAs
Work planned by themselves
Evidence
• Internal Audit
The amount / type gathered would depend upon the objective set
Eg It may just be a check that assets exist, with no concern over their value
• External Audit
Governed by IAS 330 - gather evidence to address misstatement risk
The risk would have been analysed during planning and in the light of subsequent
evidence
Reporting
• Internal Audit
191 aCOWtancy.com

lOMoARcPSD|6235581
Determined by the nature of the assignment
• External Audit
Determined by statute & ISAs 700/5/6
Communicate to stakeholdersScope and limitations of Internal Audit
The scope is to give assurances on...
Items such as
1. Effectiveness of systems
2. Effectiveness of Internal Controls
3. Whether manuals are followed
4. Whether internally produced info is reliable
5. Compliance with OECD
Oooh nice... What about limitations though?
• Reporting System 
Reporting to the Finance Director - who is responsible for some of the info being
reported on! 
Action 
Report to Audit Committee instead
• Scope of Work 
Could be decided by executive directors and thus influenced away from their particular
areas (the cheeky monkeys) 
Action 
Scope decided by chief internal auditor or audit committee
• Audit Work 
Auditing their own work (Self review threat) 
192 aCOWtancy.com

lOMoARcPSD|6235581
Action 
Chief internal auditor doesn’t establish any controls herself 
(see how modern metrosexual I am... ;)
Lengths of Service 
Too long in IA and there may well be a familiarity threat 
Action 
Rotation of work into different areas 
So being an IA is basically just a crazy, roller-coaster of a life..
• Appointment of Chief Internal Auditor 

Don't let the CEO do it....! 
Action 
Appointed by the whole of the board or Audit committee
193 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D4d) Recognise and evaluate the impact of outsourced functions, such as
payroll, on the conduct of an audit.
Outsourcing internal audit
A firm may decide to outsource its internal audit function as this may seem
like better value for money
Advantages of Outsourcing
1. The provider will have specialist staff.
2. Cost of employing and training full time staff is avoided.
3. Outsourcing provides an immediate internal audit department.
4. The time scale is flexible with the contract lasting just for the appropriate time.
5. Independence may be improved.
6. Audit methodology and technologies will be up to date.
Disadvantages
• If Internal and External audit are provided by the same firm (prohibited under ethics rules
in UK) then there may be a conflict of interest.
• Independence may not be ensured by outsourcing due to threat of management not
renewing the contract.
• The cost of outsourcing may be so high as to encourage the firm not to have an internal
audit function at all.
• Lack of understanding of firms culture, objectives and attitudes.
• The standard of service provided cannot be controlled.
• Blurring of the distinction between internal and external audit function.
Minimising/Managing risks of Outsourcing

1. Setting and reviewing performance measures
2. Quality reviews and working paper reviews
3. Clear agreement on scope, responsibilities and reporting procedures
4. Ensure external audit and internal audit are two separate functions. 
194 aCOWtancy.com

lOMoARcPSD|6235581
Outsourcing v Insourcing
The use of external suppliers for finished products &services
Outsourcing
is when an external specialist organisation (also known as a service organisation) is used

to carry out functions which would normally be performed within the entity.
Service organisations usually operate in one of two ways:
1. The service organisation fully maintains the outsourced function (keeps accounting
records and internal records)
2. The service organisation executes transactions only at the request of the entity, or acts
as a custodian of assets.  
Here the reporting entity will maintain internal records relating to the outsourced
function.
Insourcing is making the finished products & services yourself
When to outsource
Low strategic importance processes
Eg. Payroll
When to insource
High strategic importance process
Eg. Where value is added
The current economic environment presents an excellent opportunity to further utilise

outsourcing as a way to reduce their manufacturing and design costs, there are challenges
and difficulties that come with this kind of change.
195 aCOWtancy.com

lOMoARcPSD|6235581
The most successful situations are those where the customer understands that
outsourcing is as much a cultural change as a strategic one for their organisation
The bottom line is that even in the best of economic times, the decision to outsource
should be made based on a careful cost/benefit analysis. It is not a quick, short-term
solution
196 aCOWtancy.com

lOMoARcPSD|6235581
Should a Process be bought?
Should we outsource?
The idea is here that some processes may be best not performed in house but rather
bought in from outside ie Outsourced
Let's think of aCOWtancy.com
Should I outsource the materials writing and videos?

I'm HOPING you're screaming "Nooooooooo!!!!"
The reason being that the whole competitive advantage of aCOWtancy.com is the
simplicity of the materials, videos (amongst a million other things :P)
In all seriousness - this is one process I wouldn't outsource - because the suppliers
competences don't match my needs
However, what about the design of the site?

Well I personally think design is of enormous strategic importance (like the materials and
videos etc).
However, here I do outsource some. Why?
Well here my strength is in teaching accountancy and not in the design and usability of
websites.
I know a fair bit about these topics and i study them daily but it is sooooo important to me
that I want to be the best in the world at it.
So I outsource it to people who I believe are the best in the world.. Naomi, Dan, Miki... take
a bow
Some processes are more suited too to outsourcing than others eg Standardised
processes (you're not losing a competitve advantage then)
197 aCOWtancy.com

lOMoARcPSD|6235581
Never forget though also the external v internal costs of processing.

Is it cheaper or more expensive to have the process outsourced
Business Process Outsourcing
Under the right circumstances outsourcing can certainly provide significant opportunities
for savings, though it is no panacea.
Sony announced plans recently to close 10 percent of its plants worldwide and shift more
manufacturing to outsourcing
Different companies will have different expectations for their outsourcing partners.
A niche business to business producers’ core competencies are very different than those
of a provider that's set up to produce large volumes of a consumer-oriented product
The current economic environment presents an excellent opportunity to further utilise

outsourcing as a way to reduce their manufacturing and design costs, there are challenges
and difficulties that come with this kind of change.
The most successful situations are those where the customer understands that
outsourcing is as much a cultural change as a strategic one for their organisation
The bottom line is that even in the best of economic times, the decision to outsource
should be made based on a careful cost/benefit analysis.
It is not a quick, short-term solution
198 aCOWtancy.com

lOMoARcPSD|6235581
Advantages of BPO
1. Cost savings
2. Improved customer care
3. Allows management to focus on core competencies
Problems of BPO
1. More outsourcing suppliers leads to fragmentation and a less cohesive business
2. Security problems
3. Managing of the outsourcers
4. Performance measuring problems
199 aCOWtancy.com

lOMoARcPSD|6235581
Auditing an outsourced function
The auditor has no direct contractual relationship with the service

organisation
Planning
1. Potential problems with access and confidentiality 
Although the service organisation should co-operate with us as it is in their interests
2. Obtain an understanding of the nature and significance of the services provided by

the service organisation
Service limited to recording and processing?

Client does all the authorising
Client uses own control policies and procedures
Service provider is accountable

Client relies on their control policies
Audit risk is now higher - new procedures required
Things to Consider
1. Nature of services provided and relationship between client and service organisation 
Regulations involved?
2. Contractual terms  
Oral or legal contract?
3. Material financial statements assertions affected ?
4. Extent to which client's accounting and internal control systems interact with service
organisations
5. Client's internal controls (to ensure completeness, accuracy, validity). Are they the
same as if processing were done "in house"?
6. Service organisation's capability and financial standing. Consider the effect of business
failure on the client entity
7. Information available in user and technical manuals
200 aCOWtancy.com

lOMoARcPSD|6235581
8. Existence of third party reports about the operation and effectiveness of the service
organisation's accounting and control systems.
Evidence when client can't get sufficient evidence

• Use the service organisations auditor's reports - on their controls
• Contact or visit the service organisation (via the user entity) to obtain specific information
• Engage the services of another auditor
201 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D5: Group audits
Syllabus D5a) Recognise the specific matters to be considered before accepting

appointment as group auditor to a group in a given situation
Syllabus D5h) Explain the responsibilities of the component auditor before accepting
appointment, and the procedures to be performed in a group situation.
Should we accept the job?
Group accounts are audited by a principal auditor with subsidiaries being

audited by other auditors
What are "Components"?

• Subsidiaries
• Associates
So what are the problems?

• Principle auditor may rely on the work of component auditors
• Complex groups mean a complex audit
• Consolidation adjustments must comply with the specific accounting standards
applicable
So what are the considerations before accepting a role as principal auditor

• Materiality of the portion to be audited
• Degree of Knowledge of the components
• Risk of material misstatement of the components
• Any additional procedures required on components
• Relationship with other auditors
202 aCOWtancy.com

lOMoARcPSD|6235581
The principal auditor will have to gather sufficient, appropriate evidence to form an opinion
on the consolidated financial statements.
In complex groups, perhaps having up to 50 subsidiaries, this is no easy task 
203 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D5c) Identify and explain the matters specific to planning an audit of group
financial statements including assessment of group and component materiality, the
impact of non-coterminous year ends within a group, and changes in group structure.
Planning a group audit
Think materiality, non-coterminous year, and changes in structure etc
Here's a nice little proforma to use in the exam
1. Group structure
The group structure must be ascertained to identify the entities that should be
consolidated
2. Materiality assessment
• If an acquisition in year - Preliminary materiality will be much higher than in the prior
year
• The materiality of each subsidiary should be assessed (in terms of the group) 
This will help decide:
• Which to visit &
• Which to do just analytical procedures on
3. Goodwill
Audit any goodwill arising on acquisitions
Audit any impairment test at the balance sheet date
4. Goodwill - Consideration
• Any shares issued - use their MV
• Any amounts in the future - Use the PV 
Check discount rate and recalculate the PV
• Any contingent consideration - Use the FV 
Check assumptions used and discount rate for this
204 aCOWtancy.com

lOMoARcPSD|6235581
5. Goodwill - FV of NA acquired
• Check FV is used not book value 
Check the FV of these items are correct (independently valued, work of others etc)
6. Groups - General
SFP - Ensure assets and liabilities of Parent and subs added together but Associate
not (separate line)
I/S - Ensure any mid year acquisitions and disposals are accounted for pro-rata
7. Additions in year
Step Acquisition - check the first acquisition has been revalued
Further Acquisition 
Ensure that the difference between amount paid and the NCI decrease goes only to
reserves and not I/S
8. Disposals
Partial disposal 
Ensure that the difference between amount received and the NCI increase goes only to
reserves and not I/S
Full disposal 
Ensure all assets, liabilities, goodwill and NCI relating to the sub have been removed
and any profit on disposal is shown in the I/S
9. Group Transactions & Balances

A list of all the companies in the group included in group audit instructions  
(to ensure that intra-group transactions and balances are eliminated) on consolidation
10. Analytical procedures

Acquiring subs with similar activities may extend the scope of analytical procedures
available.
 
This could have the effect of increasing audit efficiency
205 aCOWtancy.com

lOMoARcPSD|6235581
11. Other auditors 

(See separate section)
12. Accounting policies

Material accounting policies should comply with the rest of the group.  
So a group accounting policy for adjustment on  
consolidation may be needed
13. Timetable 
Key dates should be planned for:
• Agreement of inter-company balances and transactions
• Submission of proforma statements to Parent
• Completion of the consolidation package
• Tax review of group accounts
• Subsequent events review
• Completion of audit fieldwork by other auditors
• Final clearance on accounts of subsidiaries
• Parent's final clearance of consolidated financial statements
14. Foreign Subs

SFP Ensure assets and Liabilities are translated at the year end closing rate
I/S Ensure the transactions are translated at the average or actual rate
Goodwill Ensure it is retranslated at the year end
Forex differences Ensure these go a translation reserve and not the Income statement
15. Associates
Check accounted for correctly using the equity method 
Cost + Post acquisition reserves on the SFP 
Share of PAT on the I/S 
206 aCOWtancy.com

lOMoARcPSD|6235581
D4i) Justify the situations where a joint audit would be appropriate.
Joint Audits
Where more than one firm is appointed and are both responsible for the
opinion
There are several advantages and disadvantages in a joint audit being performed
• Advantages
Efficiency 
The subs auditor will have a good understanding of the business / controls etc so
working together will help the principal auditor catch up quicker 
This is a key issue, as the principal auditor needs a thorough understanding of the
subsidiary also for risk assessment
Resources 
A joint audit allows sufficient resources to be allocated to the subs audit, assuring the
quality of the opinion given
Quality 
Both auditors can discuss contentious issues together  
Often a ‘fresh pair of eyes’ helps.  
It should be easier to challenge management and therefore ensure that the auditors’
position is taken seriously
• Disadvantages
More expensive for the client 
From a cost/benefit point of view there is clearly no point in paying twice for one opinion
to be provided.  
207 aCOWtancy.com

lOMoARcPSD|6235581
Despite the audit workload being shared, both firms will have a high cost for being
involved in the audit in terms of senior manager and partner time
Different audit approaches 

Problems could arise in deciding which firm’s method to use, for example, to calculate
materiality, sample sizes etc  
One firm’s methods may dominate, eliminating the benefit of a joint audit being
conducted
Working Together 
There may be problems for the two audit firms to work together harmoniously
Joint Liability 
Both firms are jointly liable 
They could, however, blame each other, making the litigation process more complex 
However, it could be argued that joint liability is not necessarily a drawback, as the firms
should both be covered by professional indemnity insurance.
208 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus D5b) Identify and describe the matters to be considered and the procedures to
be performed at the planning stage, when a group auditor considers the use of the work
of component auditors.
The work of component auditors
The principal auditor should evaluate the component auditor, if going to rely
on his work
She will look at..

1. Their competence, qualifications and experience
2. The procedures carried out to obtain sufficient, appropriate evidence that the work of
the other auditor is adequate
3. The findings of the other auditor
4. The strategy of the other auditor
The principal auditor should also..

• Perform risk assessment on components
• Evaluate business risk of components
• Evaluate susceptibility of other auditors to error
• Attend the closing meetings of component audit
• Review of component files
• Evaluate whether further substantive testing should be performed at a component level
209 aCOWtancy.com

lOMoARcPSD|6235581
Support letters
When the parent undertaking (or a fellow subsidiary) is able and willing to
provide support
Group accounts are prepared on a going concern basis when a group, as a single entity, is
considered to be a going concern
So often the parent might have to guarantee this for other subs..
Many banks routinely require a letter of reassurance from a parent company stating that
the parent would financially or otherwise support a subsidiary with cashflow or other
operational problems
As audit evidence:
1. Formal confirmation is a ‘comfort letter’ confirming the parent ’s intention to keep the
subsidiary in operational existence
2. This letter of support should normally be approved by a board minute of the parent
company
3. The ability of the parent to support the company should also be confirmed, for example,
by examining the group’s cash flow forecast
4. The period of support may be limited (eg one year)  
Sufficient other evidence concerning the appropriateness of the going concern
assumption must therefore be obtained where a later repayment of material debts is
foreseen
5. The fact of support and the period to which it is restricted should be noted in the Sub's
FS
210 aCOWtancy.com

lOMoARcPSD|6235581
Horizontal groups
Horizontal groups of entities under common control increase audit risk as

fraud is often hidden via complex group structures
Auditors need to understand and confirm the economic purpose of entities within business
empires
Difficulties faced by auditors include:

1. failing to detect related party transactions and control relationships;
2. not understanding the substance of transactions with entities under common control
3. excessively creative tax planning
4. the implications of transfer pricing (eg failure to identify profits unrealised at the
business empire level)
5. a lack of access to relevant confidential information held by others
6. relying on representations made in good faith by those whom the auditors believe
manage the company when control rests elsewhere
Audit work is inevitably increased if an auditor is put upon inquiry to investigate dubious
transactions and arrangements.
However, the complexity of business empires across multiple jurisdictions with different
auditors may deter auditors from liaising with other auditors (especially where legal or
professional confidentiality considerations prevent this)
211 aCOWtancy.com

lOMoARcPSD|6235581
Auditing Goodwill
Audit procedures & Evidence needed as follows:
Basic procedures include:

1. Obtain the legal purchase agreement and confirm the date of the acquisition
2. Inspect the purchase agreement, confirm the consideration paid, and details of any
contingent consideration, including its amount, date potentially payable, and the factors
on which payment depends
3. Confirm % owned through a review of shareholder register, and by agreement to legal
documentation
4. Agree any cash paid to cash book and bank statements
5. Review the board minutes for discussion regarding the purchase
6. Obtain the due diligence report prepared by the external provider and confirm the
estimated fair value of net assets at acquisition
7. Recalculate goodwill
212 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E: COMPLETION & REVIEW
Syllabus E1. Subsequent events and going concern
Syllabus E1a) Design audit procedures to identify subsequent events which may
require adjustment to, or disclosure in, the financial statements of a given entity
Auditor responsibility for Subsequent Events
213 aCOWtancy.com

lOMoARcPSD|6235581
Purpose of a Subsequent Events Review
Auditors are responsible for their audit work from Y/E to issuing of FS
This duty is both Active and Passive
And ranges from
• Active Duty 
Between the Y/E and signing the FS
To search for all material events
• Passive Duty 
Between the signing and issue date 
To act if they become aware of anything that may affect their audit opinion
Subsequent events are events which occur after the balance sheet date
The auditor must perform a subsequent events review
This involves:
• Review post Y/E management accounts, budgets and cash flow forecast
• Review of post Y/E board minutes
• Review how management assess subsequent events and ask if any have been found
• Obtain a management representation letter confirming this
• Check post Y/E cash received to ensure:
1. Receivables are received and
2. NRV of inventory is as expected
214 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E1b) Evaluate indicators that the going concern basis may be in doubt and
recognise mitigating factors.
Going Concern Review & Indicators
Going concern is vital as the FS must show a ‘true and fair view’
The auditor will undertake a number of procedures in the going concern review:
• Look at the economic conditions of the industry at that time
• Contact providers of finance to check they're happy to continue
• Assess management intentions for the future
• Review post Y/E cash flow statements, management accounts and budgets
• Review management assumptions - are they reasonable
• Conduct analytical review of the FS to check for worsening performance
• Review correspondence with solicitors to ensure no likely actions or cases
• Review correspondence with banks to provide evidence of continued good relations
Indicators of Going Concern

• Technology changes in the industry
• Suppliers unwilling to provide credit terms
• Banks withdrawing loan facilities
• Management plans for risky diversification
• Cash-flow problems post year end or large cash outflows
• Deterioration in key ratios
• Loss of Key staff
• Legal action against the company
• Late payment of staff salaries, PAYE payments, VAT or supplier invoices
• Sales of major assets without prior warning
• Loss of key customer or supplier
215 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E1c) Recommend audit procedures, or evaluate the evidence that might be
expected to be available and assess the appropriateness of the going concern basis in
given situations.
Going Concern Responsibilities
FS are prepared on a going concern basis unless inappropriate to do so
Going concern is defined under IAS 1 as the assumption that the company will continue
in operational existence for the foreseeable future
Some Key Issues:

1. Foreseeable Future
This isn't defined :(
but is generally accepted to be at least one year into the future
and further if specific business reasons make it appropriate
2. Use of Judgement
GC involves the use of judgement on the basis of the information available at the time
3. Break up basis 
This is when GC basis is not appropriate
This values assets at their sale value and inventory at NRV
Director's Responsibility
• They must assess going concern
• They should use a suitable basis on which to base the going concern
• They should use information on sources of finance, future profitability and repayment of
debt
•
If the directors have any material uncertainties as to the going concern of the business
they must disclose them in the financial statements. 
216 aCOWtancy.com

lOMoARcPSD|6235581
Auditors Responsibility
• They must assess the appropriateness of the going concern assumption
If there are going concern issues, the auditor must ensure that sufficient disclosures are
made
Assess if can carry on for foreseeable future

Management Responsibility
At least 12 months
Decide if management are right to use going

concern status
Auditor Responsibility
Should uncertainties be disclosed
217 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E1d) Assess the adequacy of disclosures in financial statements relating to

going concern and explain the implications for the auditor’s report with regard to the
going concern basis.
Going Concern Disclosures and Reporting
Going Concern Disclosures
If GC is appropriate
No need to mention GC in their report
If GC not appropriate
Qualify the audit report
(unless management agree to alter the financial statements )
Insufficient Disclosure
Qualify the audit report
(unless management agree to alter the disclosures)
If NOT on Going Concern basis

Always refer to it in their report in an ‘emphasis of matter’ paragraph
218 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus: E2 Completion and final review
Syllabus E2a) Explain the use of analytical procedures in evaluation and review.
Analytical procedures at review stage
These are compulsory at review and at planning stage
Analytical procedures are also an effective tool for gathering evidence throughout the
audit.
By using expectations, and comparing to actuals, they highlight unexpected movements
These can then be focussed on during the audit
The financial ratios fall into 3 general categories:
1. Profitability
• Gross margin
• Net margin
• ROCE
2. Liquidity
• Receivables/Payables/Inventory Days
• Current ratio
• Quick ratio
3. Gearing
• Financial gearing
• Operational gearing
219 aCOWtancy.com

lOMoARcPSD|6235581
Whether or not the auditor relies on analytical procedures as substantive

procedures depends on 4 factors:
1. Suitability:
Analytical procedures will not be suitable for every assertion
2. Reliability:
The auditor may only rely on data generated from a system with strong controls
3. Degree of Precision:
Some figures will not have a recognisable trend over time or be comparable.
4. Acceptable Variation:
Variations having an immaterial impact on the financial statements will not hold as
much interest to the auditor as those that do.
220 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E2b) Assess whether an engagement has been planned and performed in
accordance with professional standards and whether reports issued are appropriate in
the circumstances.
Assess Audit planned and Performed correctly
This is the responsibility of the audit engagement partner, as is the audit's overall quality
Planning done properly?

The audit partner should have informed the audit team of:
Their responsibilities (including professional scepticism) and all partners
The objectives of the work to be performed
The nature of the entity's business
Risk-related issues
Problems that may arise
The detailed approach to the performance of the engagement
Supervision done properly?

The audit is supervised overall by the engagement partner.
More practical supervision is given by senior staff to more junior staff
It includes:
.(ISA 220: para. A15)
Tracking progress
Considering the competence of the team, their time and understanding
Modifying the approach as significant events come up
Ensuring key matters are considered by more experienced team members
Review done properly?

Review includes consideration of whether:
Work followed professional standards / regulations
Significant matters considered further
Consultations when needed and conclusions documented
Need to revise the nature, timing and extent of work
The work performed supports the conclusions reached
Sufficient and appropriate evidence 
221 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E2c) Evaluate as part of the final review the matters (e.g. materiality, risk,
relevant accounting standards) and audit evidence to confirm if sufficient and appropriate
evidence has been obtained.
E2d) Justify the review procedures which should be performed in a given assignment,
including the need for an engagement quality control review and recommend additional
procedures or actions needed in the circumstances.
The Need For An Engagement Quality Control Review
Quality Control Reviewer
When needed, appointed by the engagement partner

Responsible for:
Discussing significant matters
Not issuing the auditor's report until the quality control review has been completed
A Quality Control Review should include:

1. An evaluation of the significant judgments
2. An evaluation of the conclusions reached
A quality control review for a listed entity will include a review of:
. Discussion of significant matters with the engagement partner
. Review of financial statements and the proposed report
. Review of selected audit documentation relating to significant audit judgments team
. Evaluation of the conclusions reached and consideration of whether the auditor's report is
appropriate
. Whether appropriate consultations have taken place 
222 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E2e) Evaluate the use of written representations from management to support
other audit evidence
Written Representations
Definition
It’s is a (written) statement by management provided to the auditor to confirm certain matters or to
support other audit evidence
Purpose
It’s purpose is:
To obtain representations that management have prepared the FS, including;

◦ in accordance with an applicable financial reporting framework;
◦ providing the auditor with all relevant information and access to records;
◦ recording all transactions and reflecting them in the financial statements.
To support other audit evidence relevant to the financial statements if determined necessary by the
auditor or required by ISA's.
This is when other evidence is not available e.g..

• plans or intentions that may affect the carrying value of assets or liabilities;
• confirmation of directors’ judgements / estimates
• compliance issues
How are written representations obtained?
As the audit progresses, the audit team will assemble a list of those items about which it is
appropriate to seek management representations.
During completion the auditors will write to the client confirming these issues
The client must formally document, and sign, a response and send it to the auditor.
In what form are they?
A letter from the client to the auditors responding to the necessary points. (It is common for the
auditor to draft the letter for the client, who simply reproduces it on their own letter-headed paper,
approves it and signs it).
223 aCOWtancy.com

lOMoARcPSD|6235581
Or even, minutes of a meeting where representations were made orally, which can be signed by
management.
Quality and reliability?
They are internal sources of evidence, and therefore subject to bias, and potentially unreliable
ISA 580 also clearly states that written representations should only be sought to support other
audit evidence. They do not, on their own, constitute sufficient evidence.
Before they can be used the auditor must consider their reliability in terms of:
• inconsistencies with other forms of evidence; and
• concerns about the competence, integrity, ethical values or diligence of management;
If they’re inconsistent then perform further procedures.

If worries about integrity etc then consider withdrawal, or if not permitted, consider the impact on
the audit report. (likely a disclaimer of opinion)
If management refuses to provide written representations - then again a probable disclaimer or

withdrawal
Additional matters requiring written representation
• directors have assessed the risk of fraud and consider it to be low;

• directors are not aware of any actual, or suspected, instances of fraud;
• all related parties have been identified and transactions with them disclosed
• directors consider the aggregate of all uncorrected misstatements to be immaterial;
• the directors have considered all subsequent events
• the directors have considered all possible events, matters and contingencies in performing
their going concern review. 
224 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E3: Auditor’s reports
Syllabus E3a) Determine the form and content of an unmodified audit report and assess
the appropriateness of the contents of an unmodified audit report.
Syllabus E3b) Recognise and evaluate the factors to be taken into account when
forming an audit opinion in a given situation and justify audit opinions that are consistent
with the results of audit procedures.
Syllabus E3c) Critically appraise the form and content of an auditor’s report in a given
situation.
Structure of an Unmodified Audit Report
ISA 700 sets out the elements of an audit report:
The headings are as follows..
1. Title
Clearly indicates that it is the report of an independent auditor
2. Addressee
Addressed appropriately based on the circumstances of the engagement
3. Auditor’s Opinion
The first section of the auditor’s report shall include the auditor’s opinion, and shall
have the heading “Opinion.”
If unmodified:
225 aCOWtancy.com

lOMoARcPSD|6235581
In our opinion, the accompanying financial statements give a true and fair view of [...] in
accordance with [the applicable financial reporting framework].
4. Basis for Opinion

Directly following the Opinion section, with the heading “Basis for Opinion”, that:
States that the audit was conducted in accordance with ISAs

Refers to the section of the auditor’s report that describes the auditor’s responsibilities
Includes a statement that the auditor is independent of the entity
Identifies the IESBA Code
States audit evidence is sufficient and appropriate to provide a basis for the auditor’s
opinion
5. Going Concern
Where applicable, the auditor shall report in accordance with ISA 570
6. Key Audit Matters

Communicate key audit matters in the auditor’s report
7. Responsibilities of Management for the Financial Statements.
In some jurisdictions, the appropriate reference may be to those charged with

governance.
This shall describe management’s responsibility for: (Ref: Para. A40–A43)
Preparing the financial statements / internal controls to prevent MM due to fraud or

error; and
Assessing the entity’s ability to continue as a going concern
8. Auditor’s Responsibilities for the Audit of the Financial Statements
This states that the objectives of the auditor are:
226 aCOWtancy.com

lOMoARcPSD|6235581
To obtain reasonable assurance that FS are free from material misstatement
To state that reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists; and
To state that the auditor exercises professional judgment and maintains professional
skepticism throughout the audit
To state that the risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
To obtain an understanding of internal control
To evaluate the appropriateness of accounting policies
To conclude on the appropriateness of management’s use of the going concern basis
To evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Example:
Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
227 aCOWtancy.com

lOMoARcPSD|6235581
A further description of our responsibilities for the audit of the financial statements is
located at [Organisation’s] website at: [website address]. This description forms part of
our auditor’s report.
9. Other Reporting Responsibilities

Heading titled “Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section
10. Name of the Engagement Partner

The name of the engagement partner shall be included in the auditor’s report for audits
of complete sets of general purpose financial statements of listed entities unless, in
rare circumstances, such disclosure is reasonably expected to lead to a significant
personal security threat
Why?
ISQC 1 requires it plus naming the engagement partner in the auditor’s report is
intended to provide further transparency to the users of the auditor’s report
11. Signature of the Auditor

The auditor’s report shall be signed
12. Auditor’s Address

The auditor’s report shall name the location in the jurisdiction where the auditor
practices.
13. Date of the Auditor’s Report

The auditor’s report shall be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on
the financial statements
228 aCOWtancy.com

lOMoARcPSD|6235581
Why?
The date of the auditor’s report informs the user the auditor has considered the effect
of events and transactions of which the auditor became aware and that occurred up to
that date. Identifies the report as an ‘Independent Auditors Report’
The key things to note about the above are:
A Key audit matters section in the report 

A key matter is the most significant matters that came up in the AUDITORS judgement -
NOT those likely to be most important to users 
This is because the auditor would otherwise have to: 
1) Determine what is important to a user 
2) Possibly include 'original information' in the audit report (which may blur the roles of
management, those charged with governance and the auditor).  
These key matters would be selected from the matters the auditor sends to those charged
with governance
Independence 
An explicit statement about the auditor’s independence and other relevant ethical
requirements
Engagement partner 
Explicitly state the name of the engagement partner
Prominence of opinion 
Placed at the beginning of the report
Ordering  
A preferred (not mandatory) ordering of the items in the report
229 aCOWtancy.com

lOMoARcPSD|6235581
Going concern  
Explicitly reported on, including the appropriateness of management's use of the going
concern basis and any material uncertainties identified
Auditor responsibilities  
Some responsibilities could be moved to an appendix, or referenced to a website of an
appropriate authority
ISSUES TO THINK ABOUT
Key audit matters disclosure
1. Possibly unnecessary where such matters are already in the Annual Report by those
charged with Governance
2. Whats the difference between an Emphasis of Matter and a Key Audit Matter?
Liability disclaimer paragraph
It is not a requirement of auditing standards but it has become increasingly common for
audit firms to include a disclaimer paragraph within the audit report.
It states the fact that the auditor’s report is intended solely for the use of the company’s
member, and that no responsibility is accepted or assumed to third parties.
1. Advantages: 
– Potential to limit liability exposure 
– Clarifies extent of auditor’s responsibility 
– Reduces expectation gap 
– Manages audit firm’s risk exposure
2. Disadvantages: 
– Each legal case assessed individually – no evidence that a disclaimer would offer
protection in all cases 
– May lead to reduction in audit quality
230 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E3d) Assess whether or not a proposed audit opinion is appropriate.  
Syllabus E3e) Advise on the actions which may be taken by the auditor in the event that
a modified audit report is issued.
Audit Opinion
Modified Audit Reports
If the auditor disagrees with some aspect of the financial statements or is unable to state
that they provide a true and fair view, then a modified audit report will be issued
There are two types of modified audit report:

1. An unqualified audit report with an ‘emphasis of matter paragraph’
2. A qualified audit report
Emphasis of matter
• If the auditor wishes to draw attention to a particular matter, but agrees with the financial
statements an ‘emphasis of matter’ paragraph will be included in the audit report.
• The matter referred to will be fully disclosed in the accounts and the auditor is simply
drawing the users’ attention to it.
• The paragraph will make it clear that the opinion is not qualified and will be given a
separate heading after the opinion paragraph.
Qualified Reports
There are two reasons that an auditor may qualify an audit report:
1. Disagreement
2. Insufficient Evidence
Disagreement
A qualified report for the reason of disagreement will be issued if the auditor disagrees with
the application of accounting policies, the policies used, treatment of a particular item or
the adequacy of disclosures
231 aCOWtancy.com

lOMoARcPSD|6235581
• The disagreement can be either: 

Material or 
Material & Pervasive
• A material disagreement - "Except for" Paragraph

This will mean that the auditor agrees with the rest of the financial statements, but
disagrees with that particular element of them.
“Except for” paragraph 
In this situation the auditor will qualify the audit with an ‘except for’ paragraph i.e. In our
opinion, except for the effect on the financial statements of the matter referred to in the
preceding paragraph, the financial statements give a true and fair view,
• Material and Pervasive - Adverse Opinion

A disagreement which is material and pervasive is of such significance that the financial
statements do not give a true and fair view.
Adverse opinion 
In such a situation an adverse opinion is issued i.e. the financial statements do not give a
true and fair view.
Insufficient Evidence
If the auditor is unable to form an opinion, then the report will be qualified for Insufficient
Evidence
Insufficient Evidence will be due to being unable to obtain sufficient evidence which should
have been available.
• The insufficient evidence can be either: 

Material or 
232 aCOWtancy.com

lOMoARcPSD|6235581
Material & Pervasive 
• Material - "Except for" paragraph

A material insufficient evidence will mean that the auditor agrees with the rest of the
financial statements, but is unable to agree with that particular element of them
“Except for” Paragraph 
In this situation the auditor will qualify the audit with an ‘except for’ paragraph i.e. In our
opinion, except for the matter referred to in the preceding paragraph, the financial
statements give a true and fair view
• Material & Pervasive - Disclaimer of opinion

Insufficient evidence which is material and pervasive is of such significance that auditor
is unable to state whether the financial statements give a true and fair view
Disclaimer of Opinion 
In such a situation a disclaimer of opinion is issued i.e. the auditors do not express an
opinion on the financial statements
233 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E3f) Explain the implications for the auditor’s report on the financial statements
of an entity where the opinion on a component is modified in a given situation.
Modified Audit Reports
So what if the subsidiary report is qualified - is the group too??
It basically depends if the group auditor thinks it is material or not

If so - then the group accounts are qualified too
If not - then no effect
Examples:
• Group auditor can't get full access to sub
Disclaimer of Opinion in component
Except for paragraph in group
• Subs inventory is incorrectly valued 

It is material to the group also
Qualified "except for" in component
Qualified "except for" in group
• Going concern doubts over the sub 

It is material to the group also
Emphasis of matter paragraph in component
Emphasis of matter paragraph in group
• Going concern doubts over the sub 

It is NOT material to the group though
Emphasis of matter paragraph in component
No modification in group
234 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E3g) Recognise when the use of an emphasis of matter paragraph, other
matter paragraph and KAM disclosure would be appropriate.
EOM and Other Matter Compared
There are 2 types of modified but not qualified reports..
Emphasis of Matter
This refers specifically to matters in the FS
Other Matters
This refers to anything else the auditor may wish to bring to the users attention
Emphasis of matter Other matter
What is it? Draws attention to fundamental Draws attention to another issue

issue in the fs users need to know about
Where does it go? Normally before KAM (but can go After the KAM paragraph
after)
Headed how? Emphasis of matter Other matter
Key points? Highlights the matter in the FS by The effect on the auditor's
reference to its page or note responsibilities
number
Effect on opinion? None None
Example Uncertainty regarding a Auditor wishes to resign but

contingent liability legally cannot
235 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E3h) Discuss the courses of action available to an auditor if a material

inconsistency or material misstatement exists in relation to other information such as
contained in the integrated report
What is different in today’s financial reporting

environment?
Well, annual reports now have way more narrative info - with things such as:
The entity’s business model

Risks they face and
Uncertainties
And users like it - as it helps them understand the more complex areas in the financial statements
There’s more documents other than the annual report such as management reports, or
statements on corporate governance / internal control and risk assessment
Sp the IAASB wanted:

• Greater consistency regarding auditors’ consideration of other information;
• Enhanced responsibilities regarding other information; and
• Auditors to state their responsibilities (re other info) in their reports
What are the main changes in relation to the scope and

auditor’s work effort?
The scope of other information
Other information is anything in the annual report (except for the FS and auditors report)
The auditor’s work effort with respect to other information
The auditor must read the other information and see if:
There’s a material inconsistency between the other information and the FS; and
There’s a material inconsistency between the other information and the auditor’s knowledge
The auditor must also remain alert for indications that the other information appears to be
materially misstated, regardless if obtained prior to or after the date of the auditor’s report
236 aCOWtancy.com

lOMoARcPSD|6235581
What will be communicated in the auditor’s report about

other information?
The auditor’s report will always include a separate Other Information section
It will include:
A statement that management is responsible for the other information.

1. Identification of the other information obtained
2. A statement that the auditor’s opinion does not cover the other information
3. A description of the auditor’s responsibilities relating to reading, considering and reporting on
other information
4. When other information has been obtained prior to the date of the auditor’s report, either :
A statement that the auditor has nothing to report; or
A statement that describes the uncorrected material misstatement
237 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus E4: Reports to those charged with governance

and management
Syllabus E4a) Critically assess the quality of a report to those charged with governance
and management.
. Syllabus E4b) Advise on the content of reports to those charged with

governance and management in a given situation.
Management Letters
The aim of the letter to management is to ensure the audit runs smoothly and
to highlight weaknesses and problems
Matters which should be included are:

1. Weaknesses in internal controls
2. Failures by staff to adhere to proper procedures
3. Any efficiencies which could be made
4. Any other specific issues
Often times the auditor does not sufficiently communicate these matters and such
problems include:
• No outline of weaknesses in internal controls or assessment of potential effects
• No assessment of the cost of implementation of recommendations
• Lack of recognition of clients experience in running their own business
• ‘Rubbing management up the wrong way’ with wide ranging suggestions.
The report to management takes the form of either a formal report or a letter
238 aCOWtancy.com

lOMoARcPSD|6235581
Communication with those charged with governance
Communicate matters of audit importance

Management letter - see above
Specific internal control issues
239 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F: OTHER ASSIGNMENTS
Syllabus F1: Audit-related and assurance services
Syllabus F1a) Describe the nature of audit-related services, the circumstances in which
they might be required and the comparative levels of assurance provided by professional
accountants and distinguish between:
i) audit-related services and an audit of historical financial statements

ii) an attestation engagement and a direct engagement.
Levels of Assurance
Reasonable Assurance is where there is sufficient evidence that the subject

matter agrees to certain criteria.
It is a high level of assurance

It is Positive Assurance (This means that in their opinion the subject has been prepared
in accordance with the criteria required)
An example is the external audit
Limited Assurance is where there's sufficient evidence that the subject matter
is plausible in the circumstances
It is a moderate level of assurance

It is a Negative Assurance (This means that in their opinion there is nothing to suggest
that the subject has not been prepared in line with the relevant criteria)
240 aCOWtancy.com

lOMoARcPSD|6235581
An example is a review engagement

Here, the auditor reviews the financial statements using less evidence than required by an
audit
It is not an audit.
The report will not be to the shareholders but to the body that commissioned the review
e.g. Bank, Directors.
Remember!
• A Review Engagement gives Negative Assurance
• An Audit Report gives Positive Assurance
Absolute assurance will never be provided by an assurance engagement

whether audit or review
241 aCOWtancy.com

lOMoARcPSD|6235581
Non-Audit Engagements
There are three main types of non-audit engagements
They are more likely to arise with small companies, and only a general awareness is
needed
They are...
1. Review Engagements
• Offer limited assurance
• Used by smaller companies who do not require an audit but may want to apply for
finance
• The assurance given is negative assurance
• Involves a lot less work than an audit
• Agree the terms with the client and send an engagement letter
• Look at the systems in place and how judgements made by management affect the
items under review
• Assess materiality & procedures to be used
• Analytical Review (year on year figures) + forecasts as well as establish relationships
between balances
• Assess the entities accounting practices and how information is recorded during the
review and examine minutes of important meetings to establish any facts which may
affect the financial statements.
2. Agreed Upon Procedures 

In certain situations the auditor may not be asked to express an opinion, but merely to
present the results of a set of procedures 
• The client draws their own conclusions from the data presented by the auditor.
• Eg. A report for a bank as to the validity of the receivables balance
• The report will only be for the client
• The engagement letter shows the purpose & procedures to be applied and the form
of any report.
242 aCOWtancy.com

lOMoARcPSD|6235581
• It should also make clear that neither an audit, nor a review is being carried out and
that the report should not be distributed
3. Compilation Engagements 
This is where the accountant is asked to compile financial information for presentation
to the client 
An example is the compilation of FS from a client’s books and records

No opinion is issued
Eg.  
On the basis of information provided by management we have compiled, in accordance
with the International Standard on Related Services (or refer to relevant national
standards or practices) applicable to compilation agreements, the balance sheet of
Jamima Ltd at 31 March 20XX and statements of income and cash-flows for the year
ended then.
 
Management is responsible for these financial statements.  
We have not audited or reviewed them and accordingly express no opinion thereon. 
ACCOUNTANT Date 
Address
243 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F2: Specific assignments
1) Due Diligence
2) Review of interim financial information
3) Prospective financial information
4) Forensic audits 
For each of the other assignments listed above:

a) Define and describe the purpose of each type of assignment and analyse the
appropriate level of assurance that may be offered by a professional firm in relation to
these assignments.
b) Evaluate the matters to be considered before accepting the engagement, including

any ethical and
professional considerations.
c) Plan the assignment to gather suitable evidence and provide an appropriate level of
assurance in line with the objectives of the assignment.
d) Discuss the level of assurance that the auditor may provide and explain the other
factors to be considered in determining the nature, timing and extent of examination
procedures.
e) Describe and recommend appropriate substantive, examination or investigative

procedures which can be used to gather sufficient appropriate evidence in the
circumstances.
1) Due Diligence
There is little specific guidance on due diligence reviews, despite this being
an increasingly common form of assurance
244 aCOWtancy.com

lOMoARcPSD|6235581
Normally someone buying a company wants info about the target organisation.
So, the assurance provider tries to verify any management representations and offer
practical recommendations regarding the acquisition process
Scope of a due diligence assignment compared to an audit
Fact finding from a WIDER range of sources

Such as..
• Several years prior financial statements

• Management accounts
• Profit and cash flow forecasts
• Any business plans recently prepared
• Discussions with management, employees and third parties
Purpose of a Due diligence review
1. Information Gathering 
about a target company so the buyer knows everything  
Essentially the aim is to uncover any ‘skeletons in the closet’ before a decision
regarding the acquisition is made.
2. Verification of specific management reps

3. Identification of assets and liabilities 
Especially internally generated intangibles such as customer databases and brand
names (these won't show on the SFP)
4. Operational issues 
Risk can come from issues such as high staff turnover, or suppliers contract terms
5. Acquisition planning 
Look for commercial effects of the acquisition. Eg. synergies & economies of scale 
Also acquisition expenses to pay such as redundancies and change management
245 aCOWtancy.com

lOMoARcPSD|6235581
6. Management involvement 
Reduces time spent by the directors on fact finding, leaving more time to focus on
strategic matters to do with the acquisition and on running the existing group.
7. Credibility 
An external investigation is independent & impartial view, enhancing the credibility of
the amount paid for the investment.
NO aim to provide assurance that financial data is free from material misstatement
No detailed audit procedures will be performed unless there are specific issues which
cause concern
More AP used
More forward looking
No detailed tests of control
Information requested for Due diligence review

1. Directors, and any other key management personnel’s contracts of employment  
– these will be needed to see if there are any contractual settlement terms if the
contract of employment is terminated after the acquisition.
2. An organisational structure should be obtained- to identify the members of
management and key personnel and their roles
3. Details of any legal arrangement, such as a lease.
4. Prior-year audited financial statements, and management accounts for this financial
year - FS will also provide useful information regarding contingent liabilities, the liquidity
position of the company, accounting policies, and the value of assets.
5. The most recent management accounts for the current year should be analysed.
6. Forecasts and budgets for future periods
246 aCOWtancy.com

lOMoARcPSD|6235581
2) Review of Interim Financial Information
Some companies are required to report interim results after six months of
their financial year
This will usually be an income statement and certain balance sheet items
Level of Assurance Given:

• Negative
The objective is to see if anything has come to the auditor's attention that suggests that
the information is not in accordance with an identified financial reporting framework
The auditor:
1) Makes inquiries
2) Performs analytical and other review procedures
The review will NOT include:

• Tests of accounting records through inspection, observation or confirmation
• Obtaining corroborative evidence in response to enquiries
• Other typical audit tests (e.g. test of controls)
Planning an Interim Review

1. Create an Engagement Letter
• Objective and scope of the review
• Management's responsibility for: 
1) Internal Controls 
2) Making records available 
3) Written representations
• Level of Assurance (Negative)
• Style of Report
247 aCOWtancy.com

lOMoARcPSD|6235581
2. Understanding the Entity 

As the review will be carried out by the auditor, this means updating the understanding
from the year-end audit and the last interim review 
• Identify potential material misstatement

• Identify their likelihood
• Select the inquiries, analytical and other review procedures
3. Procedures:
• Read minutes
• Consider effect of any past report modifications
• In group audits, communicate with component auditors
4. Inquire about..
• Changes in accounting policy
• Any relevant unusual circumstances
• Assumptions relating to FV valuations
• Related Party Transactions
• Contingent liability details
• Fraud / Non-compliance events
5. Analytical procedures including..

• Actual interim to expected and prior interim results
• Actual interim to budget and actual financial results
• Comparison to similar company's interim results
• Compare key items (e.g. revenue, expenses) by month, by product line, by source of
revenue, by location
6. Going Concern
• Management assessment of GC changed?
• Any significant factors since Y/E to affect GC?
• Discuss with management if GC doubts
• Consider adequacy of GC disclosures 
248 aCOWtancy.com

lOMoARcPSD|6235581
3) Prospective financial information
Prospective financial information is ‘future information’
It covers:
1. Forecasts up to one year ahead
2. Projections up to five years ahead
Forecasts
are based on expected future events
Projections
are based on hypothetical assumptions
A Hypothetical Illustration
is based on assumptions about uncertain future events and undecided
management actions
Targets
are based on assumptions about future performance
249 aCOWtancy.com

lOMoARcPSD|6235581
Prospective Financial Information
This is financial information based about possible future events and actions
PFI work is highly subjective in its nature, and its preparation requires the exercise of
considerable judgement
Before accepting a PFI engagement:

1. Agree terms
2. Get knowledge of the business
3. Clarify the time period it relates to
Get written management reps on..

1. Its intended use
2. The completeness of their significant assumptions
3. Their acceptance of their responsibility for the PFI
Assurance given
Given the subjective and speculative nature of the PFI, an opinion cannot be given on
whether the results shown in the report will be achieved, so only negative assurance can
be given
• Negative 
250 aCOWtancy.com

lOMoARcPSD|6235581
Accepting a PFI engagement
There are matters to consider before accepting an engagement
These are:
1. Who will use the information?  
Internal or External? 
If it's 3rd parties for investment decisions - more risky for the auditor
2. What assumptions have been made? 

Best-estimates and assumptions may have little basis and will lead to higher risk
3. What elements are included in the information?  

The auditor must understand the information
4. How long is the period covered? 

Short term forecasts are more reliable than long term
5. Will the information be for general or limited distribution
251 aCOWtancy.com

lOMoARcPSD|6235581
Procedures and Assurance on PFI
The assurance given is limited and negative usually
So they will state that ‘nothing has come to their attention’ to suggest the assumptions are
not a reasonable basis for the forecast
Examination Procedures
Verifying PFI will be based around analytical procedures and assessing the validity of the
assumptions
Possible procedures:
1. Assess management assumptions
2. Is it prepared on a consistent basis with historical financial statements, using
appropriate accounting policies
3. Are calculations correct?
4. Is information properly prepared on the basis of the assumptions
5. Agree the cash figure to bank statement or bank reconciliation
The procedures are often restricted to enquiry and analytical review
252 aCOWtancy.com

lOMoARcPSD|6235581
PFI Report
A PFI report will include:
The following:
1. Title, date & address
2. Reference to standards or laws
3. Basis of opinion 
An opinion as to whether the PFI is properly prepared on the basis of the assumptions
and is presented in accordance with the relevant financial reporting framework.
4. Identification of the PFI contents
5. Statement of management’s responsibility for preparation of the PFI
6. Reference to the purpose and distribution of the report 
The PFI is based on hypothetical assumptions, the events and figures contained in the
PFI may not necessarily occur as expected.
7. Expression of assurance (negative)
8. Appropriate caveats (on achievability of results)
9. Accountants name etc
Such a report would:

State if anything has come to the auditor's attention to believe that the assumptions do not
provide a reasonable basis for the PFI
Give opinion that it's prepared on the basis of the assumptions and is presented in
accordance with the relevant financial reporting framework
State that actual results are likely to be different from the PFI & and the variation could be
material in the case of a projection, state that there are hypothetical assumptions about
future events and management's actions that are not necessarily expected to occur 
253 aCOWtancy.com

lOMoARcPSD|6235581
4) Forensic Audits
Forensic Accounting
Forensic accounting uses accounting, auditing, and investigative skills to examine a

company’s financial statements.
• A financial investigation where the evidence may be use in court generally

• Covers..
• Forensic Investigations &
• Forensic Auditing
Forensic Investigations
A forensic investigation is a process whereby a forensic accountant carries out procedures

to gather evidence, which could ultimately be used in legal proceedings or to settle
disputes.
• Eg. fraud or money laundering cases
Forensic Auditing
Forensic auditing uses audit procedures within a forensic investigation to find facts and
gather evidence, usually focused on the quantification of a financial loss.
Objectives of a Forensic Investigation

1. Decide if a fraud has actually taken place
2. Discover the perpetrator(s) of the fraud, and ultimately to assist in their prosecution
3. Quantify the financial loss
4. Produce evidence which is sufficient and relevant enough to be used to assist legal
proceedings
254 aCOWtancy.com

lOMoARcPSD|6235581
Steps in investigating a suspected fraud
1. Determine the type of fraud
2. Consider how the fraud could have taken place 

Eg. Usually by circumventing internal controls
3. Gather evidence 
- Determine the identity of the perpetrator(s) and 
- The monetary value of the fraud.  
Gathering evidence includes: 

– The motive for the fraud, 
– The ability of the alleged fraudster to conduct the fraud, and 
– Any attempt made by the alleged to conceal the crime. 
- An examination of accounting records and other documentation,  
- The use of computer-assisted auditing techniques (CAATs), 
- Interviewing employees of the company, and  
- Discussions with management.
 
Evidence must be sufficient and relevant.
4. An interview with the suspect(s)
5. Produce a report for the management 

- summarising all findings 
- concluding on the identity of the fraudster(s) and  
- the amount of financial loss suffered.  
This report is also likely to be presented as part of evidence during court proceedings.
6. An advice can be provided to management
255 aCOWtancy.com

lOMoARcPSD|6235581
Application of Forensic Auditing
Different practical contexts could appear in the exam
Such as:
Insurance claims 
Possibly to quantify losses
Fraud 
Such as tax evasion - where we trace funds etc
Professional negligence 
To quantify damages
The auditor may assist in legal proceedings as an expert witness.
To be an expert witness, the auditor must be suitably qualified and experienced
256 aCOWtancy.com

lOMoARcPSD|6235581
Forensic auditing and Ethics
Forensic auditors are often in contact with criminals..
This can create an ethical threat - lets see this in light of the fundamental principles
Threats:
Advocacy threat 
Try not to feel pressured into promoting the interests of the client
Self Review 
Ensure that they possess the specialist knowledge and skills to undertake the work
required
Confidentiality 
but reveal all relevant information required to the court
In order to maintain the reputation of the profession, the auditor should be sure to act in a
professional manner at all times
257 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F3: The audit of social, environmental and

integrated reporting
Syllabus F3a) Plan an engagement to provide assurance on integrated reporting

(performance measures and sustainability indicators).
Syllabus F3d) .Discuss the form and content of an independent verification statement
of an integrated report
Purpose and content of an integrated report
To explain to providers of financial capital how an organisation creates value

over time
The ‘building blocks’ of an integrated report are:
Guiding principles 
These underpin the integrated report 
They guide the content of the report and how it is presented
Content elements 
These are the key categories of information  
They are a series of questions rather than a prescriptive list
Guiding Principles
1. Are you showing an insight into the future strategy..?
2. Are you showing a holistic picture of the the organisation's ability to create value over
time? 
Look at the combination, inter-relatedness and dependencies between the factors that
affect this
3. Are you showing the quality of your stakeholder relationships?
258 aCOWtancy.com

lOMoARcPSD|6235581
4. Are you disclosing information about matters that materially affect your ability to create
value over the short, medium and long term?
5. Are you being concise?  
Not being burdened by less relevant information
6. Are you showing Reliability, completeness, consistency and comparability when
showing your own ability to create value.
Content Elements
1. Organisational overview and external environment 
What does the organisation do and what are the circumstances under which it
operates?
2. Governance 
How does an organisation’s governance structure support its ability to create value in
the short, medium and long term?
3. Business model  
What is the organisation’s business model?
4. Risks and opportunities  
What are the specific risk and opportunities that affect the organisation’s ability to
create value over the short, medium and long term, and how is the organisation dealing
with them?
5. Strategy and resource allocation 
Where does the organisation want to go and how does it intend to get there?
6. Performance 
To what extent has the organisation achieved its strategic objectives for the period and
what are its outcomes in terms of effects on the capitals?
7. Outlook 
What challenges and uncertainties is the organisation likely to encounter in pursuing its
strategy, and what are the potential implications for its business model and future
performance?
259 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F3b) Describe the difficulties in measuring and reporting on economic,

environmental and social performance and give examples of performance measures and
sustainability indicators.
Key performance indicators
 
Many companies now publish some key performance indicators (KPIs) in the FS
The increased tendency to disclose such data is often in response to shareholder
expectations
Types:
Financial 
such as ratios based on the financial statements
Non-financial 
such as targets on social and environmental matters
The Assurance approach

1. Definition
2. Calculation method
3. Reporting Purpose
4. Evidence available
Problems for the Assurance Provider

• Getting precise definitions of KPI targets
• Poor KPI data capturing systems
• Manipulation of results / spin
However, an assurance report provided on the KPIs should add credibility to the published
data if sufficient evidence is available
260 aCOWtancy.com

lOMoARcPSD|6235581
Examples of Environmental / Social KPIs
• Noise? 
Number of noise complaints each year
• Employee care? 
Number of injuries sustained at work each year
• Environment? 
Quantity of C02 emitted each year
In practice it is often difficult to generate appropriate KPls.
One key reason for this is that social and environmental effects may be impossible to
quantify.
For example, job satisfaction is difficult to measure.

It is possible to gather statistical information on this, but is it useful / reliable enough?
Systems for gathering information on these KPls may also not be established enough
261 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F3c) Describe substantive procedures to detect potential misstatements in

respect of socio-environmental matters.
Substantive procedures on socio-environmental

matters
Examples of the impact of social and environmental matters on financial

statements
• Provisions (for example, for site restoration, fines/compensation payments)

• Contingent liabilities (for example, in relation to pending legal action)
• Asset values (issues may impact on impairment or purchased goodwill/products)
Substantive Procedures: Asset Valuation
The assets might be impaired:

Remember you need to do an impairment review if there's a change in the environment
(social / regulatory etc) so…
• Review board minutes for indications of regulations change

• Review trade magazines also for any such changes
• Discuss with management also
If a change has happened you need to see if the directors have done the impairment
review already (like they should have)
If not - ask why not. A refusal to do so it will affect the audit report
If so - and the valuation of the asset has been adjusted then just audit the impairment
review.
262 aCOWtancy.com

lOMoARcPSD|6235581
Substantive Procedures: Provisions
Remember a Provision should be recognised when:
1. There's an obligation (legal or constructive)

2. There's a probable outflow
3. a Reliable Estimate can be made
Environment policy = To clean up contamination, therefore create a provision for any

environmental damage
If the directors have already made the Provision - audit the amounts and disclosures by
reviewing correspondence with regulators and review the regulations yourself
Substantive Procedures: Contingent Liabilities
Remember this is a POSSIBLE obligation only, or NOT PROBABLE outflow or NOT able
to be estimated reliably
The general audit procedures to establish if contingent liabilities exist are the same as the
ones for provisions, given above. 
263 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F4: The audit of performance information (pre-

determined objectives) in the public sector
Syllabus F4a) Describe the audit of performance information (pre-determined objectives)

and differentiate from performance auditing.
Audit of performance information
The audit of Performance information isn’t:

An audit of performance - ie. Are the operations effective and offering value for money
The audit of Performance Information is:

The audit of the information about the achievement of a Public sector organisation’s
objectives
So we are looking at information about things like waiting lists in hospitals, league tables
for schools, better staff morale etc
So the key thing is the term information which should be:
• Relevant
• Reliable
• Timely
• Accurate
• Understandable
• Neutral
• Verifiable
So as auditors we provide assurance about the quality of the information the organisation
gives about their objectives
264 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F4b) Plan the audit of performance information (pre-determined objectives),

and describe examination procedures to be used in the audit of this type of information.
Plan the audit of performance information
How is such an Information Audit planned?
Step 1: Understand the information in the first place
Ask how it was collected and aggregated?

What systems (and controls) are used in the above
We can do this by discussions with management and then we can document these
processes and systems
Step 2: Inspect the Original Documents

Step 3: Analytical Procedures (comparisons and trends)
Step 4: Get written representations on the accuracy and completeness of the information
Step 5: Re-work some of the calculations
Step 6: Reporting
265 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F4c) Discuss the audit criteria of reported performance information, namely
compliance with reporting requirements, usefulness, measurability and reliability.  
Syllabus F4d) Discuss the form and content of a report on the audit of performance
information 
Syllabus F4e) Discuss the content of an audit conclusion on an integrated report of

performance against pre-determined objectives
Reporting
Contents of a report:
1. Title, addressee
2. Introductory Paragraph (what PI is being reported on)
3. Scope of our work
4. Criteria we used to judge it
5. Management Responsibilities
6. Our Responsibilities (we didn't prepare)
7. Inherent limitations of the Report
8. Summary and Conclusion
Criteria
So we must understand the criteria that is being used. This criteria we will refer to in the
report - e.g.. Waiting list times, feedback of customers etc
Inherent Limitations
Remember how difficult it is to define some of the objectives, and how difficult it can be to
collect the information
266 aCOWtancy.com

lOMoARcPSD|6235581
Where is the information used
e.g. In websites, annual reports
We then provide assurance on this information in our report
An example of a public Sector body - a University
Performance information should be relevant to users, e.g. students will be interested in the
quality of the teaching provided and the likelihood of securing employment on completion
of the university course.
Other interested parties will include the government body which provides funding to the
University, regulatory bodies which oversee higher education and any organisations which
support the University’s work, for example, graduate employers.  
So, performance measures such as the graduation rate and employability rate will be
relevant as this will provide information on the success of students in completing their
degree programmes and subsequently obtaining a job.
Students will be interested in the proportion of graduates who achieve a distinction as this
may lead to better job prospects and a better return on the investment (of time and money)
in their education.
Finally, students will find the performance measure on course satisfaction relevant
because it indicates that the majority of students rated the quality of the course as high, an
important factor in deciding whether to enrol onto a degree programme.
Stakeholders other than current and potential students may find other performance
information more relevant to them, for example, potential graduate employers may be
interested in the amount of work experience which is provided on the University’s degree
programme.  
267 aCOWtancy.com

lOMoARcPSD|6235581
The performance measures are most relevant where they can be compared to the
measures of other universities.
In terms of measurability, as with many key performance indicators, it is sometimes difficult

to precisely define or measure the performance information. Some of the measures are
quite subjective, for example, the rating which a student gives to a course is down to
personal opinion and it is difficult to substantiate, for example, the difference between a
course rating of excellent and very good.
Similarly, defining ‘graduate level employment’ could be subjective. Some measures will be
easier to quantify, for example, the degree completion percentage, which will be based on
fact rather than opinion.  
268 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F5: Reporting on other assignments
Syllabus F5a) Analyse the form and content of the professional accountant’s report for
an assurance engagement as compared with an auditor’s report.
Professional Accountant’s Report
Review engagements
Remember that the auditor's objective here to see if anything has come to the her
attention causing her to believe that the financial statements are not prepared, in all
material respects, in accordance with an applicable financial reporting framework.
Reporting
There are some important differences between a review report and an auditor's report:
A review report has

Negative form of words
'Based on our review. nothing has come to our attention that causes us to believe that the
financial statements do not present fairly, in all material respects' in accordance with the
applicable financial reporting framework.’
The term 'negative assurance' does not exist. The correct term is “limited assurance',
which is logical: this is still positive assurance, but there is just less of it than when
‘reasonable assurance' (audit) is provided.
Just like the auditor's report. a modified conclusion paragraph must be preceded by a
'Basis for' modified conclusion paragraph. 
269 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F5b) Discuss the content of a report for an examination of prospective financial
information.
Professional Accountant’s Report
A PFI report will include:
The following:
1. Title, date & address
2. Reference to standards or laws
3. Basis of opinion 
An opinion as to whether the PFI is properly prepared on the basis of the assumptions
and is presented in accordance with the relevant financial reporting framework.
4. Identification of the PFI contents
5. Statement of management’s responsibility for preparation of the PFI
6. Reference to the purpose and distribution of the report 
The PFI is based on hypothetical assumptions, the events and figures contained in the
PFI may not necessarily occur as expected.
7. Expression of assurance (negative)
8. Appropriate caveats (on achievability of results)
9. Accountants name etc
Such a report would:

State if anything has come to the auditor's attention to believe that the assumptions do not
provide a reasonable basis for the PFI
Give opinion that it's prepared on the basis of the assumptions and is presented in
accordance with the relevant financial reporting framework
State that actual results are likely to be different from the PFI & and the variation could be
material in the case of a projection, state that there are hypothetical assumptions about
future events and management's actions that are not necessarily expected to occur 
270 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus F5c) Discuss the effectiveness of the ‘negative assurance’ form of reporting and
evaluate situations in which it may be appropriate to modify a conclusion.
Modifying a Conclusion
Modified conclusions are expressed in the same terms as the auditor's report
A Modified conclusion paragraph must be preceded by a 'Basis for' modified conclusion

paragraph.
The type of modified conclusion given will depend on two things:

1. The Materiality of the issue
2. The Availability of evidence
Modification: A Material Misstatement

• Material  
Qualified conclusion
• Material and Pervasive 

Adverse conclusion
Modification: Insufficient Evidence

• Material  
Qualified conclusion
• Material and Pervasive 

Disclaimer of Conclusion
An Emphasis of Matter paragraph will be used to draw users' attention to a matter of such
importance that it is fundamental to users' understanding of the financial statements.
271 aCOWtancy.com

lOMoARcPSD|6235581
An Other Matter paragraph will be used to communicate a matter (other than those that
are presented or disclosed in the financial statements) that is relevant to users‘
understanding of the review, the practitioner's responsibilities or the practitioner's report
and this is not prohibited by law or regulation.
272 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus G: CURRENT ISSUES AND

DEVELOPMENTS
Syllabus G1: Professional and ethical developments
Syllabus G1a) Discuss emerging ethical issues and evaluate the potential impact on the
profession, firms and auditors.
Syllabus G1b) Discuss the content and impact of exposure drafts, consultations and
other pronouncements issued by IFAC and its supporting bodies (including IAASB,
IESBA and TAC)
Ethical framework and a rulebook
Using a Rulebook gives the following advantages:
Certainty - a rule is a rule
Clarity - Rules can be detailed and strict in their interpretation
However these very advantages are weaknesses too (and conversely advantages of using
a framework instead)
Such weaknesses are:
Rules cannot possibly cover all situations
Rules can be interpreted too narrowly - and miss the spirit of the rule in the first place
Rules will struggle to be applied across different national borders 
273 aCOWtancy.com

lOMoARcPSD|6235581
Syllabus G2: Other current issues
Syllabus G2a) Discuss current developments in auditing standards including the need for
new and revised standards and evaluate their impact on the conduct of audits.
b) Discuss current developments in business practices, practice management and audit
methodology and evaluate the potential impact on the conduct of an audit and audit
quality.
c) Discuss current developments in emerging technologies, including big data and the
use of data analytics and the potential impact on the conduct of an audit and audit
quality.
Guidance On Smaller Audits
The lAASB generally considers all audits the same - but there are special considerations
for smaller entities
The lSAs must be followed, even in the audit of SMEs.
However, the work needed to comply with ISAs will be less - it just needs professional
judgement to decide which procedures are needed
Eg. Obtaining an understanding of a smaller entity will be much easier

Individual clarity ISAs include guidance on specific points relating to small entity audits.
It doesn't reduce the responsibility of the auditor to apply and comply with the
requirements of the lSAs.
274 aCOWtancy.com

lOMoARcPSD|6235581
Big Data
Big data is basically the huge amounts of info now available to businesses
Data analytics tries to identity patterns. trends or correlations. Making sense of it.
3 Vs of big data: there are larger Volumes, faster Velocity, more Variety.
Big Data and Audit

Recent advances in lT make it increasingly possible for auditors to examine a 100% of the
transactions - and to represent trends graphically.
This may bring about a long-term revolution in audit approach
So not only sampling would not be necessary but neither would internal control testing
The auditor would still have to understand the system producing the data. The auditor
would also need to understand and test how data got into the system in the first place
Eg. Cash received data would still need testing against the actual cash receipts.
So, data analytics will lead to a reconsideration of how controls at least are tested
They would also lead to better audits by helping auditors:
• Analysis revenue trends into product or region
• Match sales orders to cash
• Match purchase/sales orders. goods received/despatched documentation and invoices
• Test user codes for segregation of duties
IAASB ‘Request for lnput’: Exploring the Growing Use of Technology In the Audit,
with a Focus on Data Analytics
The use of DA should help the auditor to obtain an understanding of the entity and its
environment, thus improving, professional skepticism
275 aCOWtancy.com

lOMoARcPSD|6235581
Limitations of DA
• Auditors must understand the data - and its relevance to the audit.
• Even testing 100% of a population still ONLY gives reasonable assurance, as
professional judgement is always needed.
• Accounting estimates require professional judgement. DA can be a useful aid here only
• Auditors and stakeholders should not become overconfident in technology.
Current lSAs don't encourage DA, because it never really existed when they were created
Challenges to the increased use of DA
• Data Acquisition - Acquiring and storing large amounts of data and be technically difficult
• Conceptual challenges -How to use data in different ways than now
• Legal and regulatory challenges - eg data security.
• Resource availability - eg. highly-skilled data scientists
• Regulators problems - lack of experience so hard to inspect audits
• Re-training / re-skilling auditors — Significant time and investment
IESBA ED Proposed changes to the Code Addressing the long

Association of Personnel with an Audit client
The ED proposed the following changes:

• Engagement Partner Rotation (Pubic Interest Entity) - an increase from 2 to 5 years
• EQCR of a listed entity: an increase from 2 to 5 years (3 years for a public interest entity
other than listed entity)
• Agreement of those charged with governance over the application of certain exceptions
to the rotation requirements
• Where jurisdictions have different but robust regulatory safeguards... An alternative
approach to the cooling-off requirements for PIE audits
276 aCOWtancy.com

lOMoARcPSD|6235581
IESBA ED Improving the Structure of the Code of Ethics for

Professional Accountants—Phase 1 and Phase 2
The IESBA is proposing a new structure for the Code of Ethics.
Key features of phase 1 included:

• Requirements clearly distinguished from application material
• Increased clarity of responsibility for compliance
• A reorganisation of the content
• A new Guide to the Code
Phase 2 moved on to consider the following issues:

. Accountants response to non-compliance with laws and regulations (NOCLAR):
. Long association of firm personnel with an audit or assurance client; and
. Ethical issues that professional accountants in business (PAIBs) often face.
IESBA ED Proposed Revisions Pertaining to Safeguards in the code—

Phase 2
Safeguards
Key enhancements proposed in phase 1 included:
• More robust requirements relating to the application of the Conceptual Framework
• More robust description of the concept of safeguards
• New guidance on the concept of a 'reasonable and informed third party' that is essential
to properly applying the conceptual framework
Phase 2 proposals look at safeguards-related provisions in the independence sections of
the Code of Ethics (ie in relation to assurance services provided to audit client).
277 aCOWtancy.com

lOMoARcPSD|6235581
IFAC: Towards Enhanced Professional Skepticism

Observations on how PS can be enhanced
The key observations are:

1. Attention to business acumen is vital for professional scepticism 
More than just knowledge of standards. laws and regulations - a knowledge of the
client's business model
2. Environmental factors can impede PS by: 

Resource constraints 
A firm's tone at the top 
Incentive systems 
Local culture and groupthink
3. Personal traits and biases affect PS eg 

An inquisitive nature 
Response to stress. time pressures. or conflict 
Knowledge and experience 
Cultural background 
So, become aware of these traits in order to then improve professional skepticism.
4. Instil PS at the beginning of your career. so education and training are key.
5. PS is relevant even beyond audit 

Understanding PS can benefit all professional accountants. This requires further study
and research.
6. Standard setting alone will not be enough 

All stakeholders with an interest in professional skepticism have a role to play to help
cultivate a skeptical mindset.
278 aCOWtancy.com

lOMoARcPSD|6235581
IAASB Q&A Paper Professional Scepticism In an Audit of Financial

Statements
What is professional scepticism?

It is hard to define. but is fundamentally a mindset, which is linked to the ethical principles
of objectivity and independence.
It means 'being alert‘ to evidence that contradicts evidence already obtained, or which
casts doubt on the reliability of documents or explanations provided, or which may indicate
fraud.
Why is professional scepticism important in audits?

It is part of the auditor's ‘skill set“, and is part of professional judgment. It affects decisions
about:
• the procedures to be performed;
• the sufficiency and appropriateness of evidence obtained;
• the validity of management's financial reporting judgments; and the conclusions drawn
based on audit evidence.
What can firms do to enhance awareness of professional scepticism ‘s

importance?
It is a matter of education. training and experience, as well as the culture of the firm.
At a firm-wide level, this means establishing policies and procedures. promoting a quality-
oriented culture. and establishing training and continuing professional development
schemes.
At an engagement level, this means that the partner must communicate the importance of
quality, and that the audit team is able 'to raise concerns without fear of reprisals‘.
At what stage of the audit is professional scepticism necessary?

Throughout the audit! Eg.at engagement acceptance when considering the integrity of
management and owners.
279 aCOWtancy.com

lOMoARcPSD|6235581
How does this relate to fraud?

The fact that fraud involves deception and concealment makes professional scepticism
particularly important in relation to it.
ISA 240 emphasises professional scepticism. particularly in the form of 'an ongoing
questioning' of whether there has been a fraud.
There are also areas where there is a required presumption that there is a risk of fraud:
revenue recognition, risks of management override of controls as a result of fraud and
accounting estimates.
Where else is professional scepticism important, other than fraud?

Significant or judgmental areas. such as:
• Accounting estimates (eg are assumptions reasonable?)
• Going concern (eg are management's plans really feasible?)
• Related party relationships and transactions (eg transactions outside the normal course
of business - misappropriation of assets?)
• Laws and regulations (eg where non-compliance may call into question going concern)
How can this be evidenced?

Audit documentation should enable an experienced auditor to understand significant
decisions made during the audit and any conclusions drawn.
As the auditor should be professionally sceptical when making these decisions. the
documentation would provide evidence of this. eg it should document the discussions the
auditors have about possible non-compliance with laws and regulations. or possible
management bias in relation to accounting estimates.
280 aCOWtancy.com

lOMoARcPSD|6235581
IAASB A Framework for Audit Quality

Although audit quality is principally the responsibility of auditors, there are many factors
that contribute to
it.
The IAASB describes these other factors using the following framework.
Contextual factors determining audit quality include:

• Business practices and commercial law
• Laws and regulations relating to financial reporting
• The applicable financial reporting framework
• Information systems
• Corporate governance
• Financial reporting timetable
281 aCOWtancy.com

lOMoARcPSD|6235581
• Audit regulation
• Litigation environment
• Attracting talent
• Financial reporting timetable
Inputs which may contribute to a high quality audit:

Values, ethics and attitudes of auditors and the audit firm
Knowledge. experience and time allocated to perform the audit
Outputs from audit quality may flow from:

The auditor
The audit firm
The entity
Audit regulators
Key interactions with regard to audit quality include:

Auditors and management, those charged with governance, users, regulators
Management and those charged with governance. regulators, users
Those charged with governance and regulators, users
Regulators and users
282 aCOWtancy.com

ACCA AAA (P7) Course Notes ACCA AAA (P7) Course Notes

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCA AAA (P7) Course Notes ACCA AAA (P7) Course Notes

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|6235581

ACCA AAA (P7) course Notes

Advanced Audit & Assurance (Association of Chartered Certified Accountants)

StuDocu is not sponsored or endorsed by any college or university

AAA Course notes

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Syllabus A: REGULATORY ENVIRONMENT 3

Syllabus B: PROFESSIONAL AND ETHICAL CONSIDERATIONS 26

Syllabus C: PRACTICE MANAGEMENT 50

Syllabus D: AUDIT OF HISTORICAL FINANCIAL INFORMATION 71

Syllabus E: COMPLETION & REVIEW 213

Syllabus F: OTHER ASSIGNMENTS 240

Syllabus G: CURRENT ISSUES AND DEVELOPMENTS 273

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Syllabus A: REGULATORY ENVIRONMENT

The Need for Standards and Regulations

These 'regulations' come in 4 ways:

The international regulatory framework for audit and assurance services

1. International Federation of Accountants (IFAC) pronouncements

Downloaded by Abbas Khan (saravk_3@hotmail.com)

• PIOB (Public Interest Oversights Board)

• IESB (International Ethics Standards Board)

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Public Interest Oversights Board

A profession has a responsibility to the public

Public Interest Oversight Boards:

1. Oversees IFAC's auditing and assurance

2. Believes standards should be high quality, clear and usable

3. Ensures auditors act independently of personal interests, and be responsive to

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Structure of the Committee

Role of the committee

1. To improve the quality of ﬁnancial reporting

2. To increase the conﬁdence of the public in the ﬁnancial statements.

3. Assist directors in meeting their responsibilities in respect of ﬁnancial reporting.

4. Provide a channel to external auditors to report concerns or issues.

5. Review the company’s system of internal controls.

6. Strengthen the position of internal audit by providing greater independence from

7. Appointment of external auditor.

Downloaded by Abbas Khan (saravk_3@hotmail.com)

2. Frees up Executive time

3. Corporate Governance monitored

4. Appropriate Internal Controls

6. Strengthens external audit independence

1. Executive directors may perceive it as a threat to their authority.

2. Finding non executive directors with appropriate expertise may be difﬁcult.

3. Additional costs will be involved.

4. Too much detail may be thrust upon non executive directors.

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Communication with the audit committee

1. To ensure independence between the board and the audit ﬁrm.

Downloaded by Abbas Khan (saravk_3@hotmail.com)

Syllabus A2: Money laundering

Money Laundering Basics

Money laundering is creating the appearance that money obtained from

The term is widely deﬁned to include:

Money laundering usually consists of three steps

Downloaded by Abbas Khan (saravk_3@hotmail.com)

is the depositing of funds into the ﬁnancial system

The keeping of comprehensive transaction records by ﬁnancial organisations provides a

Downloaded by Abbas Khan (saravk_3@hotmail.com)

International Efforts on Money Laundering

The Financial Action Task Force on Money Laundering (FATF) is an

AAA Course notes 

• PIOB (Public Interest Oversights Board) 

• IESB (International Ethics Standards Board) 

2. Frees up Executive time 

3. Corporate Governance monitored 

4. Appropriate Internal Controls 

6. Strengthens external audit independence 

1. To ensure independence between the board and the audit ﬁrm.  

2. Measures to prevent money laundering including:  

2. Also company registration documents 

• Written Policies and Procedures 